MGMT 485W Midterm
Intellectual capital
The collective talent, skills, knowledge, info, intellectual property, etc. In a firm The measure is market value minus book value
What can we use to determine if A product innovation has occurred
We can use the product lifecycle as a test
A resource or capability that lacks V-R-I-N is a
Weakness and probably produces a competitive disadvantage that hurts profitability
Rivalry: High strategic stakes - Single-industry firms
also have high strategic stakes, as all revenues come from one industry. Single-industry firms are usually the fiercest competitors in an industry; they have to be to protect their profits as well as their survival.
Strategy analysis
analyzing the situation
Most corporate marriages are
acquisitions not mergers
Capabilities General Management
activities cut across functions. They are *not* considered functional know-how, thus are not intangible resources
Corporate-level strategy is all about
adding value for *stockholders*
Global strategies
address how to expand operations outside the home coun- try in order to grow and prosper in a world where competitive advantage is deter- mined at a global level
Macroeconomic forces
affect the general health and well-being of a nation and the regional economy of an organization interest rates, gross domestic product (GDP), employment and unemployment rates, the inflation rate and consumer price index (CPI), etc.
Proactive management
aggressive and energetic; behaving as a stimulus instead of a response; in control of a situation; anticipatory; planning ahead or being prepared to intervene
How high storage costs increase rivalry:
all companies have an incentive to discount prices as finished-goods inventory ages
How high fixed costs increase rivalry:
all companies want to operate at high volume so they can spread out the fixed costs over as many units as possible, thus keeping the cost per unit down and allowing them to charge a reasonable price. All companies have an incentive get so big that the industry is likely to have overcapacity. If there is overbuild or if demand starts to slow down for an unforeseen reason they cut prices to sell more. As soon as Firm A does this, Firms B and C get worried and do it, too, which prompts Firm A to cut again, followed by Firms B and C... and we have a price war.
Three ways that standards emerge
companies can might lobby the government to mandate an industry standard companies can set them themselves by cooperation among each other (businesses) -can be done in a situation where not coming to a consensus might be harmful because of the uncertainty that it would create in the minds of consumers or the risk it would pose to manufacturers and distributors
Capable Competitors
companies that can move quickly to imitate the pioneering company
multidivisional company
competes in several different businesses and has created a separate, self-contained division to manage each.
If a company's strategies result in superior performance, it is said to have
competitive advantage
A Strength/core competency that is valuable but not rare contributes to
competitive parity and will neither improve nor hurt profitability
Supplier Power factors
concentrated suppliers suppliers' product or labor/skills Suppliers can threaten to forward integrate While rivals cannot backward integrate Rivals industry not an important purchaser of suppliers outputs
scenario analysis
considering the "what if's" or outcomes when different assumptions are violated important because forecasting techniques are always based on assumptions that may turn out to be false.
quality as reliability
consistently performs the function it was designed for, performs it well, and rarely, if ever, breaks down
value chain
consists of many tasks and activities that must be performed to create the products or services sold by a particular firm Strategic managers use it to determine whether each is adding value for customers
corporate-Level Managers
consists of the chief executive officer (CEO), other senior executives, and corporate staff
tacit price coordination
coordination reached without communication
Entry barriers: Economies of scale
cost savings due to operating at high volume all kinds of costs per unit go down when the number of units goes up. Thus, there are economies of scale in advertising, R&D, HRM, accounting, and all the business functions
when companies can share resources or capabilities across business units, it lowers their
cost structure compared to a company that operates in only one industry and bears the full costs of developing resources and capabilities. For example, P&G makes disposable diapers, toilet paper, and paper towels, which are all paper-based products that customers value for their ability to absorb fluids without disintegrating. Because these products need the same attribute—absorbency—P&G can share the R&D costs Similarly, because all of these products are sold to retailers, P&G can use the same sales force to sell its whole array of products
Switching costs
costs the buyer must pay to switch from Brand X to Brand Y
Diversification can ___________ value
create, and destroy,
Costs in High-Technology Industries
fixed costs of developing the product are very high, but the costs of producing one extra unit of the product (marginal costs) are very low
criteria for Identification and Screening acquisition targets
focus on revealing : (1) its financial position, (2) its distinctive competencies and competitive advantage, (3) changing industry boundaries (4) its management capabilities (5) its corporate culture
Purpose of a strategy
gain an advantage over an opponent, strategy is all about winning.
__________ involves more than one business function
general management
perfect information
goes both ways. Buyers know current prices, real quality, durability, and features of all the various brands.
decline
growth becomes negative degree of rivalry among established companies usually increases Due to excess capacity price wars spark
economic Benefits of Standards
helps to guarantee compatibility between products and their complements can help reduce confusion in the minds of consumers -ex: Blue ray v DVD can help reduce production costs -Once a standard emerges, products that are based on the standard design can be mass produced reduce the risks associated with supplying complementary products, and thus increase the supply for those complements
three corporate-level strategies discussed in chapter 9
horizontal integration, vertical integration, strategic outsourcing
The industry environment
immediately surrounds the firm, up close and personal. This suggests that most of the leaks in the firm's porous boundaries involve stuff in the industry environment. So, the firm interacts with the industry environment on a frequent basis. I have deliberately drawn the industry environment as pentagon-shaped to suggest that five aspects of the industry environment matter most.
Resources
what we have to work with ex: corporate assets inputs to the firm something the firm possesses through -ownership -legal right -identity
vertical disintegration
when a company exits industries adjacent to its core industry in the industry value chain. For example, Ford, which was highly vertically integrated, sold all its companies involved in mining iron ore and making steel when more efficient and specialized steel producers emerged that were able to supply lower-priced steel
ROIC
"(Return on invested Capital) related to value added for customers, but also considers the financing—debt and equity—needed to generate sales from customers"
Stakeholder
"Anyone who affects/is affected by the acheivement of the firm's goals or has legitimate claim on the firm ex: *Capital Market stakeholders* -Shareholders -Creditors *Product market stakeholders* -customers -suppliers -competitors -Unions *Organizational Stakeholders* -Employees *Other* -Host communities -Govt regulators -Media -Special interest groups
Government and social restrictions
"Governments (especially those outside the U.S.) and local communities can discourage exit to prevent job loss and negative regional economic effects. This can be aggravating for strong rivals but local residents believe the economic well-being of their region is more important than greater profits for distant companies.
corporate-Level Manager roles
"In consultation with other senior executives, their role is to oversee the development of strategies for the whole organization includes defining the goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the entire organization provide a link between the people who over- see the strategic development of a firm and those who own it (the shareholders)"
the feedback Loop
"Indicates that strategic planning is ongoing: it never ends. Once a strategy has been implemented, its execution must be monitored to determine the extent to which strategic goals and objectives are actually being achieved, and to what degree competitive advantage is being created and sustained"
Ways to measure profitability
"ROS (where return is based on either net income or operating income), ROA ROE ROIC (Finance experts favor) NPM (Net Profit Margin) OPM (operating profit margin)"
SWot analysis
"The comparison of strengths, weaknesses, opportunities, and threats purpose is to identify the strategies to exploit external opportunities, counter threats, build on and protect company strengths, and eradicate weaknesses goal is to create, affirm, or fine-tune a company-specific business model to best align a company's re- sources and capabilities to the demands of the environment in which it operates
Strategic management on going process
"Understand/create a mission Analyze the situation (inside and out) Select strategies implement those strategies"
Henry Mintzberg's model of strategy development
"a company's realized strategy is the product of whatever planned strategies are actually put into action (the company's deliberate strategies) and any unplanned, or emergent, strategies many planned strategies are not implemented/go unrealized because of unpredicted changes in the environment strategies can also be implemented due to unplanned responses to unforeseen circumstances (Emergent strategies) *emergent strategies are often successful and may be more appropriate than intended strategies*"
strategy
"a plan, a series of maneuvers that deploy resources in such a way as to obtain a specific results a set of related actions that managers take to increase their company's performance"
strategic management process alternative names
"analysis -> ready decisions-> aim actions -> fire"
Shakeout
"demand approaches saturation levels: more and more of the demand is limited to replacement because fewer potential first-time buyers remain. rivalry between companies can build demand is no longer growing at historic rates, and the consequence is excess productive capacity. in an attempt to regulate companies cut prices which can lead to a price war
Strategic leadership
"how to most effectively manage a company's strategy- making process to create competitive advantage. increases the performance of a company, thereby increasing the value of the enterprise to its owners, its shareholders."
to increase shareholder value, managers must pursue strategies that
"increase the profitability of the company and ensure that profits grow To do this, a company must be able to outperform its rivals; it must have a competitive advantage"
profitability and shareholder value are significantly:
"positively correlated as long as we observe a reasonable sample of firms. *Nevertheless, as we saw in the case of American Airlines, profitability and shareholder value are sometimes uncorrelated in an individual firm."
Strategy implementation
"taking actions at the functional, business, and corporate levels to execute a strategic plan. the task of putting strategies into action, which includes: designing, delivering, and supporting products; improving the efficiency and effectiveness of operations; and designing a company's organizational structure, control systems, and culture"
shareholder value
"the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: -capital appreciation in the value of a company's shares -dividend payments.
strategic role of business-level managers
"translate the general statements of direction and intent from the corporate level into concrete strategies for individual businesses. concerned with strategies that are specific to a particular business."
Competitors' capability to imitate a pioneer's innovation depends primarily on two factors:
(1) R&D skills (2) access to complementary assets.
to increase profitability, a corporate-level strategy should enable a company or one or more of its business divisions or units to:
(1) at a lower cost (2) in a way that results in increased differentiation
corporate strategies and diversification strategy should enable a company to
(1) at a lower cost, (2) in a way that allows for differentiation and gives the company pricing options, (3) in a way that helps the company manage industry rivalry better ***in order to increase profitability
three principal reasons why diversification may lead to a loss of competitive advantage:
(1) changes in the industry (2) diversification pursued for the wrong reasons, and (3) excessive diversification that results in increasing bureaucratic costs
In general, corporate-level strategy involves choices strategic managers must make:
(1) deciding in which businesses and industries a company should compete; (2) selecting which value creation activities it should perform in those businesses; and (3) determining how it should enter, consolidate, or exit businesses or industries to maximize long-term profitability
To promote entrepreneurship, a company must:
(1) encourage managers to take risks, (2) give managers the time and resources to pursue novel ideas, (3) not punish managers when a new idea fails, (4) make sure that the company's free cash flow is not wasted in pursuing too many risky ventures
Three general organizational competencies that help a company increase its performance and profitability
(1) entrepreneurial capabilities (2) organizational design capabilities (3) strategic capabilities
Vertical integration increases product differentiation, lowers costs, or reduces industry competition when it
(1) facilitates investments in efficiency-enhancing, specialized assets, (2) protects product quality, (ex: del monte buying banana plantations (3) results in improved scheduling (makes things quicker ex: JIT)
Four factors have a major impact on the intensity of rivalry among established companies within an in- dustry:
(1) industry competitive structure, (2) demand conditions, (3) cost conditions, (4) the height of exit barriers in the industry
Benefits of Outsourcing
(1) lower its cost structure, (2) increase product differentiation 3) focus on the distinctive competencies that are vital to its long-term competitive advantage and profitability.
Three reasons for high failure rate of internal new ventures:
(1) market entry on too small a scale (2) poor commercialization of the new-venture product (3) poorbcorporate management of the new-venture division
Process innovation compared to process development
* process innovation* -Radically new process for making an existing product -Does not create a new industry -Customers cannot physically see any difference in the product they're buying *Process development* - No such term but there could be -Improves an existing process
US economy then versus now
*1950s* Industrial age Manufacturing Machines Tangible assets *Now* Info age Knowledge Brain power Intangible assets
ecological forces
*Another force, not mentioned in the book) Pertains to the physical, natural environment These forces are increasingly affecting people, firms, industries, and macroeconomic, technological, demographic, social, political/legal, and global trends
Mission V Vision
*Mission* Who we are Our identity In our DNA
Henry Mintzberg's model of strategy development: Strategy types
*Planned Strategies* -Can be deliberate strategies that become realized -Can be unrealized due to unpredicted changes *Emergent strategies* Can be realized due to: -Serendipity (beneficial chance) -Lower level managers -unpredictability
Product innovation Compared to product development
*Product innovation* - Creates a new industry lifecycle - Example: Cell phones to smart phones (A groundbreaking change) *Product development* - Extends an existing industry lifecycle - Example: Diet Coke to Coke zero (Not a groundbreaking change)
Product innovation compared to process innovation
*Product innovation* Associated with: -Early stage of industry lifecycle -Differentiation strategy *Process innovation* Associated with: -Later stages in the industry lifecycle -Cost leadership strategy
The general environment affects:
-All firms -All industries
Factors leading to rivalry for small firms
-Large number of rivals but no dominant firm -fragmented industry (large number of small sized firms) -no firms can be big enough to dominate and call the shots
Forces in the General Environment
-Macroeconomic forces -Technological forces -Demographic forces -Social forces -Political/legal forces -Global forces
Porter's five forces of competition
-New entrants -Suppliers -customers -rivals/competition -Substitutes
how to cope with forces in the general environment
-Reactive management -Proactive management
Parent company
-The corporation -Conveys a dominant role
The general environment is also called:
-The macroenvironment -remote environment (because it is so far removed from the day-to-day operations of the firm)"
ecological forces problem
-climate change -Loss of habitat -pollution -non-sustainable development
firms can have ____ # of advantages
1 per industry/segment/niche etc.
When thinking about how a company might redefine its market and craft a new business-level strategy, Kim and Mauborgne suggest that managers ask themselves the following questions:
1. *Eliminate*: Which factors that rivals take for granted in our industry can be eliminated, thereby reducing costs? 2. *Reduce*: Which factors should be reduced well below the standard in our industry, thereby lowering costs? 3. *Raise*: Which factors should be raised above the standard in our industry, thereby increasing value? 4. *Create*: What factors can we create that rivals do not offer, thereby increasing value?
five main steps of the formal strategic planning process
1. Select the corporate mission and major corporate goals. 2. Analyze the organization's external competitive environment to identify opportunities and threats. 3. Analyze the organization's internal operating environment to identify the organization's strengths and weaknesses. 4. Select strategies that build on the organization's strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats. These strategies should be consistent with the mission and major goals of the organization. They should be congruent and constitute a viable business model. 5. Implement the strategies.
Merger
2 firm combine operations as near equals
Subsidiary
A business, line of business, or business unit Under the control of the parent *Not the legal definition of a subsidiary (not needed for this classes)
sustained competitive advantage
A company's strategies enable it to maintain above-average profitability for a number of years.
Horizontal integration
A firm acquires or merges with arrival
Distinctive competencies
A core competency which: Is unique to a firm/firm specific strength Competitors cannot match or imitate Leads to a sustainable competitive advantage allows differentiation or lower costs *These are both necessary and sufficient for a sustainable competitive advantage
absolute cost advantage
A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match.
Vertical integration
A firm becomes one of its own suppliers distributors for buyers It basically goes backwards or forwards in its chain
Reasons for exiting an industry
A firm comes to the realization that it's not very good in a particular industry The industry no longer fits its core competencies mission or vision The industry is no longer attractive digital declining lifecycle stage or an environmental threat such as a paradigm threat And other reasons
Unrelated diversification
A firm operates in multiple industries that are NOT similar
Related diversification
A firm operates in multiple similar industries for example same operating processes, logistics, or marketing
focuser
A firm that targets a narrow group of customers using a cost focus strategy or differentiation focus strategy
Premise of multi industry corporate level strategies: Investment opportunities
A firm's shareholders have many investment opportunities -A firm can use free cash flow for dividends instead of expanding into another industry - *A successful strategy must improve shareholder wealth
Innovator: license innovation
A form of strategic alliance A defensive approach -If the innovator knows that the competitive advantage will be short-lived this would be the best decision Best when: Complementary assets owned by investor- No Barriers to imitation- Low
Premise
A foundational principle upon which the logic of a concept Is built
The VRIO Framework
A framework managers use to determine the quality of a company's resources, where V is value, R is rarity, I is inimitability, and O is for organization
Strategic alliances and alternatives acquisition or new venture
A legal contract between companies agree to work together for specific. Time and split the profits in a certain way Cooperative venture involving: -Multiple firms -Legal contract -Partnership towards a common goal Combines resources capabilities core competencies To develop manufacturer and distribute goods and services
Strategic alliance
A legal contract between companies that agreed to cooperate For a specific period of time to develop, manufacture, and/or distribute goods and services and then split the profits in a certain way EX: Franchise agreements and supply contracts
Sub markets
A little niche where it's easier to convince customers of the benefits of the technology over the old The new technology may hit the major market segment last New technology usually invaded the old industry through these EX: The transistor which was invented as a replacement for vacuum tubes. This later when on To be used In the hearing aids of market, thenIn the pocket radio submarket, and much later into TVs
hostage taking
A means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain
parallel sourcing policy
A policy in which a company enters into long-term contracts with at least two suppliers for the same component to prevent any incidents of opportunism
Boston consulting group (BCG) Matrix
A portfolio management technique that's classification is based on the industry lifecycle stage and the share of the market in the industry Involves: Stars Cash cows Question marks Dogs
Metaphors For a multi industry Corporation
A portfolio of businesses - Or a portfolio of investments -A family Think of a stock portfolio that has to be managed to be successful the portfolio manager must keep solid performers find prospective Winners and weed out poor performers
Customer-oriented vs product-oriented business definition
A product-oriented business definition focuses on the characteristics of the products sold and the markets served, not on the customer needs the products satisfy. Such an approach obscures the company's true mission, because a product is only the physical manifestation of applying a particular skill to satisfy a particular need for a particular customer group"
Core competencies
A resource or capability that is a real strength In A firm Necessary but not sufficient for a sustainable competitive advantage
technical standards
A set of technical specifications that producers adhere to when making a product or component. -an important competitive advantage ex: Microsoft windows is the standard OS for most PCs QWERTY keyboard
Strategic interrelationships:
A strategic interrelationship occurs when a firm operates in Industries A and B but cannot leave Industry A without hurting its bigger or more important business in Industry B. If several firms in Industry A have strategic interrelationships, high exit barriers are a problem.
generic business-level strategy
A strategy that gives a company a specific form of competitive position and advantage vis-àvis its rivals, resulting in above-average profitability *Originated by Michael Porter
Devil's advocacy
A technique in which one member of a decision-making team identifes all the considerations that might make a proposal unacceptable
Steps in acquisition and restructuring
Acquire a promising performer Replace the top managers in the acquired firm. *No matter what they say they're the ones responsible for such poor performance Raise cash to fix her performance but do not make investments in the acquired firm from the parent company -Cash can be raised by Divesting an essential part of the acquired company and/or selling some of its valuable but unessential assets Increase profits and he acquired from by fixing its business level strategy Control be acquired from by rewarding its new business level managers based on increased revenues and efficiency *(optional) Sell the acquired business at a higher price than the acquisition price.
Acquisition and restructuring
Acquire and fix low performing firms
Take over
Acquisition not solicited by target firm
Reactive management
Adapt, respond to environmental stimuli receptive and sensitive; replying, answering, influenceable
Ways to change a corporate portfolio of businesses
Added business via: -Acquisitions (marrying Someone to expand your family) -Internal new ventures (Getting birth to new family members) -Strategic alliances (Living with someone to get the benefits of marriage without all complications)
With to cheat in strategic alliances
Adverse selection -Potential partners misrepresent themselves to get the contract Moral hazard -The partner provides lower quality than promised Hold up -Support and exploit another's investments
Economies of scope
Cost savings due to operating and multiple related industries *Must occur in primary activities across the value chains
Premise of multi industry corporate level strategies: All competition occurs at the _______ level
All competition occurs at the business level -Multi industry firms do not compete against each other in the aggregate (average/ total) ex: The Coca-Cola Company and PepsiCo Do not compete in everything (Remember PepsiCo also sells snacks And cereals which the Coca Cola company does not compete with) Only their business units compete
Acquisitions are also a principal way to implement which strategies?
All of them -horizontal -vertical -diversification
Business definition
Answers: Who are our customers What are their needs How do we meet their needs"
Product innovation
Applications of technology to create radical new products for and users Accounts for a major portion of growth in US economy
resources
Assets of a company
Vertical integration- not diversified
Assumes -Balance capacity in each business An advantage or value added in a main industry Disadvantages -Bureaucratic cost of multiple industries -Increased commitment to original industry
Vertical integration- diversified
Assumes: -An even capacity in each industry Advantage of diversified revenues Disadvantages -Bureaucratic cost of multiple industries Considered related diversification even though primary activities and value chains are different
Type of substitutes
Cheap substitute More expensive substitute
buyer can threaten to backward integrate
Backward integration occurs when a company starts making for itself some of the raw materials that it used to purchase in the marketplace
Cost focus strategy
Basic and expensive product Narrow appeal to value shoppers Must find a way to reduce costs other than high-volume production Aim for cost advantage Could under priced the cost leader Maintain what ever level of quality customers find acceptable
format wars
Battles to set and control technical standards in a market
Cost leadership strategy: stay modern and efficient
Benchmarking of best practices Up-to-date equipment Early adoption of process innovations
Generic business level strategies
Broad low cost product differentiation Focus low-cost Focused differentiation
how industries can be defined
Broadly Narrowly *external analysis begins by identifying the industry *Strategic managers must define their industries carefully in order to identify their real competitors.
Combination strategy Characteristics
Brought a appeal Aim for both competitive advantages Especially relevant and international business Danger of stuck in the middle Best way to do it value innovation
Benefits of related diversification
Build on a core competency via operating synergies Cost savings and operations Offers customers products/services and adjacent industries Faster revenue growth in the single mature industry Better financial performance *Firms with a little bit (Not too much) Related diversification generally have better financial performances and firms as know diversification or firms with unrelated diversification
conglomerates
Business organizations that operate in many diverse industries
Corp level strategies vs Bus-Level strategies
Business-level strategy is all about competing for a competitive advantage in an industry (fighting to beat rivals in the market). Thus, our two business-persons are trying to stab each other in the heart. Corporate-level strategy requires a lot of juggling. Thus, our CEO is trying to wear a lot of hats and keep them from falling off. How should everything be organized? How should cash and other resources be allocated among our various departments, division, and units?
Price sensitivity factors
Buyer earns low profits/broke the item is expensive which causes buyer to research more before buying Item is undifferentiated Item has few switching costs if its unimportant buyers prefer cheapest product item does not save buyer money
Bargaining power factors
Buyer group more concentrated than rival's industry large volume purchases (the bigger the purchase the lower the price) buyer can threaten to backward integrate while rivals cant forward integrate buyer has good information
Demographic forces
By definition, demographics are statistics that describe a population, for example, population size, average age, average income level, racial breakdown, and sexual orientation breakdown. Demographics are objective, factual characteristics.
Components of an expanded SWOT
CEO's hierarchy of objectives (CEO creates the mission) Company's strengths and weaknesses Environmental opportunities and threats Stakeholders and corporate social responsibility
Which of these are NOT resources? Company assets Tangible assets Intangible assets
Capabilities
Free cash flow
Cash flow from operations above and beyond what is necessary for current uses by funding marketing campaigns, investing in R&D, building facilities, updating plant and equipment, or paying debt *Is technically the shareholders money
Paradigm shift/disruptive technology
Change in technology that revolutionizes an industry -May destroy the industry altogether make it obsolete -Force existing rivals to dramatically change to survive
Characteristics of substitutes
Comes from another industry Is less desirable/Provides less value to customers and rivals product Fulfill the same customer needed as arrivals product
Two types of buyers
Commercial/Industry buyers- more bargaining power Individuals/household consumers- less bargaining power
general organizational competencies
Competencies that result from the skills of a company's top managers and that help every business unit within a company perform at a higher level than it could if it operated as a separate or independent company
The 6th force
Complementors companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the combined products better satisfy customer demands.
Possible corporate level strategies
Concentration Horizontal integration Vertical integration Related diversification Unrelated diversification
O+T
Conditions in a firm's external environment, that is, outside the firm
Number of strategies at a Corporation: corporate level strategy versus business level strategy
Corporate level strategy- one Business level strategy- One per industry or line of business
Decision-making responsibility and a multi industry company: Corporate level strategy VS Business level strategy
Corporate level strategy: -CEO An executive vice president's (Called top management team or TMT) -With oversight by Board of Directors Business level strategy -General manager of each line of business -With oversight by CEO/TMT
How value is measured:Corporate level strategies VS Business level strategies
Corporate level strategy: -Value for stockholders -Shareholder returns Business level strategy: -Value for customers -Profitability
How value is added the Corporate level strategy versus business level strategy
Corporate level strategy: Various ways that depends on the strategy Business level strategy: Develop core competencies and distinctive competencies Produce a competitive advantage
types of competitive advantage
Cost advantage/low cost differentiation
Six business level strategies
Cost leadership Cost focus Differentiation Differentiation focus Combination Focus combination
Two types of business level strategies
Cost leadership strategy Differentiation strategy Both can target customers broadly or narrowly
Any value chain activity can
Create value for customers become a core competency or distinctive competency Contribute to competitive advantage
Differentiators: Emphasize R & D
Creative flair Product innovation Product development Complicated product designs High-quality raw materials
Strengths
Critical capacities (internal to the firm) that make it easier for the firm to make profits
Paradigm shifts: Principal case the new technology is initially
Crude and expensive (This keeps companies thinking that new technology is not a threat) but both these dimensions evolve rapidly Firms work physical bugs out and get the cost down as a gain experience
Harvesting tactics
Cut R&D Cut most maintenance Reduce advertising Reduce customer service Postpone disclosing the harvest as long as possible
Ways to change a corporate portfolio of business
Cut business via: -Divestiture -Harvesting -Liquidation Undo: -Acquisitions -Internal new ventures -Strategic alliance
Ways to discourage cheating in strategic alliances
Detailed contracts with monitoring Trust Exchange hostages Credible comments Maintain market discipline via: -Renegotiating contract periodically -Parallel partners
How to recognize the corporate strategy: when revenues are not diversified
Determine if one line of business supplies for another or is in the buyer/distributor for another -If yes, vertical integration strategy -If no, concentration strategy
How to recognize the corporate strategy: When revenues are diversified
Determine if primary activities in value chains are crossed lines of business are similar and coordinated -If yes, related diversification strategy -If no, unrelated diversification strategy
What a differentiation focuser does
Developed a total understanding of the target market Taylor products/services to customers exact needs Minimize any price premium Maintain whatever level of costs customers find acceptable
process innovation
Development of a new process for producing and delivering products to customers.
product innovation
Development of products that are new to the world or have superior attributes to existing products
Techniques for Improving Decision Making
Devil's advocacy Dialectic inquiry outside view
The Importance of complementary resources to strategic alliances
Different resources that each partner brings a strategic alliances When combined can lead to core competencies for distinctive competencies that need a firm could readily create hello
In general, the larger the number of competitors in an industry, the more (easier/difficult) it is to establish informal pricing agreements
Difficult
Corporate level strategy: task
Domain definition -Finding the best scope of operations
Business level strategy: task
Domain navigation -Protecting against five forces of competition -Creating a competitive advantage in one industry
Benefits of concentration
Easiest corporate level strategy to manage -You only have to worry about one set of five forces Lowest investment after startup -Best performers in most industries
How related diversification can add value
Economies of scope -Leveraged or transfer core competencies or distinctive competencies -Shared activities Market power -Pool negotiating power
Incremental innovation
Enhancing existing practices or outputs Small improvements in and processes Evolutionary applications within an existing paradigms *Not really innovations Improvements in products or processes are very desirable and can enhance the firms competitive advantage but these improvements are not sufficient To protect the firm against threats
Opportunities
Environmental conditions (external to the firm) that make it *easier* for the firm to make profits
Threats
Environmental conditions (external to the firm) that make it *harder* for the firm to make profits
Forecasting requires
Environmental scanning Environmental monitoring Scenario Analysis
resource-based view of the firm (RBV)
Every firm has a unique bundle of resources and capabilities To create value for customers strategic managers must find -a good fit between S+W and O+T -a defendable competitive position
How to recognize a corporate strategy
Examine revenues Compute percentage of overall corporate revenues from largest line of business -If over 70%, not diversified -If under 70%, diversified
barriers to imitation
Factors or characteristics that make it difficult for another individual or company to replicate something.
T/F Because related diversification involves more sharing of competencies, it can boost profitability in more ways than unrelated diversification, and is therefore the better diversification strategy
False some companies can create as much or more value from pursuing unrelated diversification * unrelated company does not need to achieve coordination between business units; it has to cope only with the bureaucratic costs that arise from the number of businesses in its portfolio. In contrast, a related company must achieve coordination among business units if it is to realize the gains that come from utilizing its distinctive competencies which increase bureaucratic costs
T/F internal new venturing has a high success rate
False there is a high risk of failure. Research suggests that somewhere between 33 and 60% of all new products that reach the marketplace do not generate an adequate economic return and that most of these products were the result of internal new ventures
T/F A firm does not need separate business level strategies for each industry in which it competes
False it needs a separate business level strategy for each industry
T/F any commonality between their value chains is sufficient for creating value
False the distinctive competency being transferred must have real strategic value
T/F there is no trade off between differentiation and low cost
False there is a trade-off
T/F For most, companies, achieving superior performance relative to rivals is not a challenge.
False, it is the ultimate challenge
Advantages of new venture over acquisition
Fewer coordination/integration problems Maintain relatedness in the case of related diversification Assume less debt (As compared to a merger and acquisition) Better understand product innovation
measuring overall company performance/strategy effectiveness:
Financial performance builds wealth for shareholders and cumulative total return measures the value added for stockholders
S+W
Firm capacities based on internal resources and capabilities
Operating in the O+T area only
Firms also get in trouble This is common in evolving high tech markets "Wannabe" firms are so attracted to the Opportunity of the new tech that they won't admit they don't have the necessary internal Strengths
When there is a lack of switching costs:
Firms can easily attract each other's customers
Operating in the S+W area only
Firms get in trouble The best firms in the old tech have great internal Strengths, keep making better versions of their old product, and try to ignore the Threat from the new tech.
According to I/O Economics:
First, analyze external O+T for several industries. Pick an industry with minimal competition from Porter's five forces. Create appropriate internal S+W to match the requirements of the industry environment.
According to the Resource-Based View:
First, analyze internal S+W. Then analyze various industries. Pick an industry (O+T) that matches the firm's bundle of resources and capabilities.
When a company decides to expand into new industries, it must construct its business model at two levels
First, it must develop a business model and strategies for each business unit or division in every industry in which it competes Second, it must develop a higher-level multibusiness model that justifies its entry into different businesses and industries
ways to improve the performance of an acquired company
First, replace the top managers of the acquired company with a more aggressive top-management team. Second, the new top-management team sells off expensive assets such as underperforming divisions, executive jets, and elaborate corporate headquarters; it also terminates staff to reduce the cost structure. Third, the new management team devises new strategies to improve the performance of the operations of the acquired business and improve its efficiency, quality, innovativeness, and customer responsiveness. Fourth, to motivate the new top-management team and the other employees of the acquired company to work toward such goals, a companywide, pay-for-performance bonus system linked to profitability is introduced to reward employees at all levels for their hard work. Fifth, the acquiring company often establishes "stretch" goals for employees at all levels; these are challenging, hard-to-obtain goals that force employees at all levels to work to increase the company's efficiency and effectiveness.
Overhead
Fixed costs that cannot be broken down and assigned to various departments or divisions of a company EX: Rent Utilities Insurance Accounting Etc.
Cost leadership strategy: pay attention to the cost of operations
Flexible manufacturing Lean production techniques TQM to reduce costs JIT inventory systems State of the art materials Management Easy to use manufacture product designs
Market segmentation; focus approach
Focuses on an even smaller market than narrow markets
Capabilities General Management examples
Formal organization structures Information system control mechanism the corporate culture CEO's leadership style
scenario planning
Formulating plans that are based upon "what-if" scenarios about the future.
__________ occurs in a single business function
Functional management
4 Sets of strategies that will create and sustain a competitive advantage
Functional-level strategies Business-level strategies Global strategies Corporate-level strategies
Radical nature of innovation
Fundamental changes and breakthroughs Major departures from existing practices Paradigm shift/disruptive technology -Existing products Or methods of production are destroyed and replaced with new ones Transforms or revolutionizes the whole industry
First mover advantages for product innovation
Gain: -Brand recognition - Brand loyalty Build: -Economies of scale -Experience opportunity to exploit network effects and positive feedback loops able to create switching costs able to accumulate valuable knowledge related to customer needs, distribution channels, product technology, process technology, etc.
Explicit Knowledge
Knowledge that is easy to learn Codified documented Easily reproduced widely distributed
Global forces
Global forces are macroeconomic, technological, demographic, social, and political/legal trends that occur *worldwide*. Examples are currency exchange rates, recessions and recoveries, population growth rates, poverty rates, technological progress, political unrest, political corruption, terrorism, and social values in various countries and regions.
Liquidation definition
Going out of business ASAP to stop heavy losses from getting worse Sell assets such as inventory equipment furnishings and facilities separately at a deep discount from book value -Like a garage sale Business ceases to exist at the end *Least attractive option *Done at the companies losing money hand over fist in a particular line of business, They choose to go out of business to stop the bleeding and save it's other lines of business
public domain
Government- or association-set standards of knowledge or technology that any company can freely incorporate into its product.
Harvesting
Gradually exiting a line of business Business seizes to exist at the end Maximize cash flow during harvest A company ceases to Invest anything in the business *The point of harvesting the pumpkin patch is to take us a little produce out not continue to feed water and nurture it
Differentiation
Greater benefits than other brands Usually have a higher price (but value of benefits exceed price difference)
Achieving synergy/adding value is __________ (easy/hard)
Hard Many attempts are not successful Problems and risks of strategies are certainties Benefits of and ways That value can be added are just possibilities
Tacit Knowledge
Hard to write down or verbalize Difficult to transfer to another person It requires: -The knowledge holders consent -Practice on the learners behalf -Trust -Repeated interactions Example: Learning claims knowledge within my job. It's more experience than something you can actually learn in a training class
Advantages of strategic alliance
Have your cake and eat too Can achieve: -Market power -Economies of scope -Parenting Without vertically integrating or diversify internally
Stars
High industry growth and high marketshare They need a lot of help to keep up with the growth in fast-growing industries They will just about break even in terms of cash flow
Questionmarks
High industry growth low market share Usually little subsidiaries in emerging markets/High tech businesses that innovate -Need money for everything like R and D, building facilities, paying for pioneering costs Etc. *Since technological invasion is risky not all ?'s will succeed
Risks of Outsourcing
Holdup -company will become too dependent upon the specialist provider of an outsourced activity and that the specialist will use this fact to raise prices beyond some previously agreed-upon rate. Increased Competition -As firms employ contract manufacturers for production, they help to build an industrywide resource that lowers barriers to entry in that industry -over time they may eventually produce their own end products in competition with their customers Loss of Information and Forfeited Learning Opportunities -A company that is not careful can lose important competitive information when it outsources an activity
Threat of entry
Likely that someone is able to enter more competition lower profits for rivals
Types of acquired businesses
Horizontal integration- *Identical* Primary activities and value chains of parent and acquisition firms Vertical integration- *Upstream and downstream* Primary activities and value chains of parent acquisition firm Related diversification- *Similar not vertical* primary activities and value chains of parent and acquisition firms Unrelated diversification-*different not vertical* Primary activities and value chains of parent acquisition firms
Most takeovers are:
Hostile although friendly takeovers are possible
Business level strategy questions
How to compete in one industry/line of business How to compete to maximize long-term profitability
Types of capital related to knowledge and knowledge workers
Human capital Intellectual capital Social capital
outside view
Identification of past successful or failed strategic initiatives to determine whether those initiatives will work for project at hand
What a focus or does
Identify a single market segment or little niche as a target market Learn everything about the target customers needs Taylor the product to whatever the target customers want in terms of price, quality, and features
Parenting
Improve support activities in value chain Examples: Improve capabilities in: -General management -HRM -Accounting, auditing -Controls Corp. info system
Lost independence
In a single industry company, the CEO is in charge of business level strategies and can make whatever decisions Benefit that business, In a multi industry company however, the head of each line of business must make decisions that are good for the whole Corporation even when they're not ideal for a particular line of business
Terminology and multi industry firms
Parent company Subsidiary
Primary activities categories
Inbound logistics Operations Outbound logistics Marketing Service after the sale
If a company can shift from a cost structure where it encounters increasing marginal costs to one where fixed costs may be high but marginal costs are much lower, its profitability may ___________ (increase/decrease)
Increase
Two perspectives on What industry should be entered
Industrial organizational economics Resource based view
Evidence of cost leadership
Industrywide target market Attempts to cut costs and multiple value chain activities Attempt to be the innovator in: Process innovation Value innovation
Pitfalls of acquisitions: Inadequate screening of target
Ineffective due diligence Probable causes: -Rushed for have to too bidding war -Emotional fell in love with the target
Vertical integration problems
Large capital requirement Increased commitments or original industry Loss of flexibility Complex management Usually a capacity matching problem
What a firm with cost advantage does: the unexpected
Innovate or reduce costs in a different way Example: Process innovation Value innovation
There are three types of players in technological innovation:
Innovators Imitators Old tech firms
Problems with related diversification
Large capital requirement Very complex management to coordinate and control related operations High bureaucratic costs Must have strong support activities
Examples a strategic alliance
Licensing agreement Supply and distribution contract Most franchising Joint venture -A legal contract with two or more firms form a new firm -Jointly owned and operated -share profits
Intangible resources advanced factors of productions
Invisible, abstract, not physical Not usually on the balance sheet Key resource in today's knowledge economy Not as easy to buy
Reason why companies are reluctant to admit that they are harvesting a line of business
It is demoralizing for employees and worrisome for customers who wonder how they can get replacement parts or service after the sale
Distinctive competency: Valuable
It must: Fit the environment (O+T) Contribute to a cost advantage or differentiation
Complex management
Juggling and scheduling upstream and downstream businesses effectively and efficiently it's harder than it seems
process knowledge
Knowledge of the internal rules, routines, and procedures of an organization that managers can leverage to achieve organizational objectives
Rule of thumb for industry growth rate:
Look at annual growth in aggregating units or revenues from all firms in the industry. FAST GROWTH: aggregate industry growth ≥ 10% yoy (year over year) -This is a rough measure requiring some judgment calls.
Ways to recognize an oligopoly
Look at the 4-firm concentration ratio (the combined market share of the largest four firms in the industry, where market share is the % of total industry output in units or in revenues) If the 4-firm concentration ratio ≥ 80% then it is an oligopoly *They're rough measures, not precise lines in the sand. Use some judgment in the range of 78-82%. There may be times when it makes sense to call 78% an oligopoly (for instance, the industry has quickly consolidated from a 4-firm concentration ratio of 50% to 78%) and other times when 82% doesn't sound like an oligopoly (for example, the Big Four have 30%, 22%, 18%, and 12% [collectively 82% of the total market share], but Firms 5 and 6 are nearly as big with 10% each).
Cash cows
Low industry growth (mature market) but high marketshare Generate more cash than they need to invest so the parent company milks them for cash to pay dividends, support R and D throughout the corporation -Buy/prop up?'s
Dogs
Low market share and low industry growth
functional managers
Managers responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics.
general managers
Managers who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions
Type of capabilities
Manipulation of multiple resources
Short-Term Contracts
Many companies use short-term contracts that last for a year or less to establish the price and conditions under which they will purchase raw materials or components from suppliers or sell their final products to distributors or retailers
How to grow with a concentration strategy
Market development- sell existing products To new customers Product development- Sell an enhanced improved product to existing customers
Help vertical integration could add value
Market power -Increased bargaining power over buyers or suppliers -Build entry barriers -Decreased bargaining power of buyer's via differentiation
How horizontal integration adds value
Market power -Reduced rivalry -Less competition -Increase bargaining power Over buyers or suppliers *These are almost certain and regulators allow acquisition
Differentiators: emphasize marketing and customers
Market research Advertising & promotion Brand loyalty and brand name recognition Customer service Rapid response time Customization
Benchmarking
Measuring how well a company is doing by comparing it to another company, or to itself, over time.
Horizontal integration
Merging with or acquiring arrival Very common for merger and acquisitions Benefits -Increased market share -Gain economies of scale/reduced costs -Eliminate a rival Problems -More committed to a single industry -Often illegal
What a firm with Cost strategy does: The expected
Minimize costs throughout the value chain for example: Tightly control overhead A lot of cost accounting Many detailed reports Seek economies of scale Economies of scope (Savings from doing business in multiple industries) Experience curve effects
Weaknesses
Missing capacities (internal to the firm) that make it harder for the firm to make
successful strategy satisfies all four requirements
Mission (want to do) S+W (can do) O+T (might do) CSR/Ethics (should do)
results of rivalry
More competition lower profits
A company has a competitive advantage if it is above the industry average in:
Profit margins
Communication/coordination
Multi industry strategies require firms to spend a lot more information on systems, control systems, middle managers, Upper managers, Etc. To coordinate
Focus combinations strategy
Narrow Appeal Aim for both competitive advantages Easier to be successful in one segment of our niche then in the broad market
Market development can be accomplished by expanding into:
New geographic markets (Start local, become regional, then national, and international) New market segments (Start and one niche or segment and go to additional segments)
Commercialization
New ventures often fail because the company ignores the needs of the customers -they are driven by the opportunity to use a new or advanced technology to make better products and outperform competitors Thus, a new venture may fail because it is marketing a product based on a technology for which there is no demand, or the company fails to correctly position or differentiate the product in the market to attract customers
Market segmentation: standardization approach
No boundaries Market segments are not seen differently all customers look-alike
How A cost advantage protects against five forces
No rival has lower costs on the arrival can win a price war No one can enter such low costs therefore there's no entry threat Buyers cannot negotiate by threatening to change to a cheaper brands since this brand is the cheapest Cost leader is the last rival to suffer a supplier price increase Cost leader has closest price to cheap substitutes Therefore those who prefer substitutes will choose This firm instead
Financial measures that matter the the most for business level strategies
Profitability ratios, 0PM, and ROIC with NPM as backup
How are differentiation advantage protects against five forces
No rival has this unique feature Overcoming brand loyalty is very difficult for newcomers Buyers have brand loyalty and cannot find unique features elsewhere Differentiator can fast pass along supplier price increases as It will have little effect on the company since buyers are not price-sensitive For buyers substitutes are extremely unattractive because they lack the unique feature
All the same size
No seller can be big enough to set artificially high prices. No buyer can be big enough to get artificially low prices.
Differentiation strategy
Nonstandard products special features apparent to customers Meet different customer needs Aim for differentiation advantage Usually charge a premium price Maintains acceptable cost
What a cost focuser does
Offer a basic inexpensive product Appealed to value shoppers Find a way to reduce costs other than high-volume production Maintain whatever level of quality customers find acceptable
What a differentiator does
Offer a meaningful differentiated product or service Can be based on any unique features such as: Unique design Unique technology High quality customer service High quality Dealer network Convenient time
International joint ventures
Often necessary and international business Primary uses: -Overcome trade barriers/host government demands -Understand national/cultural differences
Acquisition
One from buys another -Acquire becomes parents -Acquired from becomes a subsidiary of parents or get absorbed into parents other businesses
Concentration strategy: More In depth
Operate in a single industry/line of business The first strategy of virtually every new company The most common corporate level strategy
Related diversification in depth
Operate in multiple industries having -Different production Marketing chains -Similar primary activities and value chains especially: Similar operations Same technology used to make products or deliver services Similar distribution, marketing *For diversification to be related there must be some similar primary activities in the value chains of the each line of business*
Diversification strategies
Operate on multiple production marketing chains examples separate parallel chance Involves jumping from one chain to another -Related diversification -Unrelated diversification
Unrelated Diversification
Operating in multiple industries having -Different production marketing chains -Different primary activities in value chains Treat as a portfolio of subsidiaries -Each line of business is viewed as an investment -The parent company buys holds or sells lines of businesses based solely on financial considerations
Pitfalls of acquisitions: Selfish managerial motives
Over emphasis on diversification or acquisitions in order to increase: -Firm size -CEOs compensation status and job security Cause: agency problems -Ineffective corporate governance
Pitfalls of acquisition: inability to achieve operating synergies
Over estimating value to be added via: -Economies of scale (Horizontal acquisition) -Economies of scope (Related acquisition) -Market power (Vertical or related acquisition) Observe and operational profit margin Or net profit margin -Look at Operation profit margin Before and after the acquisition *Expect operational profit margins of fall for year after the opposition because it takes time to combine everything together
Changes in the Industry or Company
Over time, a company's top-management team often changes environment often changes rapidly and unpredictably over time
Entry barriers: Capital requirements at startup
PP&E (property plant and equipment) Other costs that are not recoverable -up front R&D -Advertising -setting up customer credit -absorbing startup losses
How unrelated diversification could add value
Parenting Acquisition and restructure of poor performers Portfolio management -Set up an internal capital market *It is possible but difficult for an unrelated diversification strategy to add value for shareholders
Entry barriers: absolute cost advantages of rival firms over potential entrants
Patents and proprietary technology Favorable access to raw materials and capital Government subsidies no longer available
What makes a core competency hard to imitate
Path Dependent Casually ambiguous Socially complex
Ways for firms in the old technology to manage paradigm shifts
Perfect the old technology Make a major commitment to the new technology -Attempt to learn the new technology -How's the new technology operations and a separate department or division So it won't be sabotaged by old tech operations
Tangible resources/basic factors of productions
Physical things the firm owns outright On the balance sheet Necessary but not sufficient to any business Easy to buy for a firm with deep pockets Easiest to transfer Tangible resources are legally owned and can be traded. They appear as assets on the balance sheet.
Pitfalls of acquisitions: Heavy debt- pay too much for acquisition
Possible causes: -An adequate screening -Became emotional during bidding war Take over premiums which are usually high (30-50) *You should expect an increase in long-term and short-term debt for a year or maybe two after that That should revert to normal
Perfect Competition
Profits are 0 -high competition means low profits Conditions: -Many buyers and sellers -All the same size -Undifferentiated products -perfect information
Barriers to entry
Prevent entry less competition higher profits for rivals
value chain activities
Primary Activities Support Activities Margin
Main synergies of multi industry corporate level strategies: parallel (operational)
Primary activities- similar activities in different, parallel productivity marketing Chains
Main synergies of multi industry corporate level strategies: Vertical (operational)
Primary activities- up-and-down stream in one production marketing Chain
Differentiation focus strategy
Product with special features tailored to exact needs of target market Narrow appealed to one segment or tiny niche that focuser understands well Aim for differentiation advantage Modest or no price premium Maintain whatever level of cost customer finds acceptable
Problems with unrelated diversification
Prone to diversification for the wrong reason Disfavor from investors Hard for CEO/TM T to understand business level strategies Tend to have poor financial performance
Narrow market strategies
Provide features attractive only to a few buyers -Either one segment -Or or tiny market niche
Purpose of multi industry corporate level strategies
Provide synergy -The whole is greater than the sum of parts (2+2 = 5) -More effective together than the individual parts would be working separately -Like a marriage Stockholders are better off
New venturing is based on
R&D
functional capabilities examples
R&D capabilities Logistics capabilities Marketing capability
Process innovation
Radically improving operating processes to lower costs Examples: Changing manufacturing systems Improving materials and utilization Shortening cycle times Increasing quality
Benefits of unrelated diversification
Rapid growth (Much faster than in a single industry) Lowest bureaucratic cost of any multi industry strategy -Because there's no coordination of operations between businesses -Each line of business is a standalone operation -It's easy to evaluate the profitability of each subsidiary
HRM issues for knowledge workers
Recruitment-Finding the right people Development-Keeping their skills current and adding new skills Retention- keeping the right people
Paradigm shifts:Any technology eventually
Replaces the old technology for most purposes are altogether -Can take a long time
Scale of Entry
Research suggests that large-scale entry into a new industry is often a critical precondition for the success of a new venture -a substantial capital investment must be made to support large-scale entry Large-scale entrants can more rapidly realize scale economies, build brand loyalty, and gain access to distribution channels in the new industry
Resources vs. Capabilities
Resources What the firm has Capabilities What the firm can do
Ways for the imitator to manage paradigm shifts
Reverse engineering Strategic alliance with innovator Acquire the innovation/Make it a subsidiary of the imitators firm
rivalry vs new entrants
Rivalry occurs between firms that are already in an industry Threat of entry refers to the likelihood that new firms will be able to join the rivals. Potential entrants are *future* rivals, whereas rivalry is about *current* rivals.
Advantages of joint ventures
Share: -Risks -High costs -Resources -Core competencies International joint ventures are very useful
Imitators: characteristics
Second movers -Commercialize innovation -Usually outperform innovators Must have some distinctive competencies and or core competencies Avoid the disadvantages of innovation -Pioneer costs -Risks due to uncertainty *Usually tend to be large well established firms that know a lot about business
Benefits of vertical integration
Secure supply of raw materials or distribution channels that cannot be held hostage Control assets required to produce and deliver valuable products and services Improve scheduling avoid procurement and distribution headaches
Divestiture
Sell a line of business to another company at a premium overbook value Must find a willing purchaser Business continues to operate under new ownership *Most attractive option
Portfolio Management
Set up an international capital market to allocate cash among many businesses/subsidiaries
Disadvantages of joint ventures
Share profits An equal learning among joint venture partners Conflicts over: -Power -Control -Corporate culture
Pitfalls of acquisition: Poor coordination/integration of operations after the acquisition
Should be anticipated in the case of -Clashing organization cultures -Very different managing styles
Paradigm shifts: Time/ substitution
Since there is no substitution for the old technology it may take a long time before sales for the new technologies surpass the old Sales of the old technology often expand after the introduction of new technology -The old technology often reaches its highest level of technical sophistication after the introduction of innovation -Firms of the old technology have A believe of if it ain't broke don't fix it
Problems with concentration
Slow growth when the industry matures Dependence on one single market/industry -All eggs in one basket -Quite vulnerable to environmental threats
Product development
Small but noticeable improvements or in hands men's and existing products -Tide -new tide -tide with liquid crystals -liquid tide etc.
Old tech firms
Some are imitators But some new technological innovations as general environment threats that are too big to fight
Paradigm shifts: Complementary assets
Something that completes or makes full, whole, or perfect EX: Intangible assets and capabilities related to business functions like operations, marketing, and logistics Sufficient tangible assets
examples of high exit barriers
Specialized assets Fixed costs of exit Strategic interrelationships Emotional exit barriers Government and social restrictions
Cost leadership strategy
Standard product Broad appeal Usually high volume production Aim for a cost advantage Underpriced everyone else Maintains acceptable quality -Called competitive parity in differentiation
Internal new ventures
Starting line of business insider firm from the ground up -Also called: New ventures Internal development *Commonly used for commercialization of technological innovation *Also use for related diversification
Premise of multi industry corporate level strategies: Risk For stockholders
Stockholders can diversify risk for themselves *A successful strategy must add value in a way that stockholders cannot by themselves
a company's closest competitors are those in its
Strategic groups, not those in other strategic groups in the industry.
the strategic management process requires
Strategy analysis Strategy formulation Strategy Implementation
Pressure from substitutes
Substitute improving in price for performance versus rivals product -The closer the substitute to the rivals product the greater threat Substitute produced by the high profit industry (Powerful) Rivals product lacks Differentiation Rivals product lacks switching costs
Imitators
Technology followers Also called second movers They are reactive For them technological innovation is an industry environment *threat* that must be dealt with
goal
precise, measurable, desired future state that a company attempts to realize
Main synergies of multi industry corporate level strategies: hierarchical
Support activities- better overall corporate management
Superior Strategic Management Capabilities
TMT must possess the intangible, hard-to-define governance skills that are required to manage different business units in a way that enables these units to perform better than they would if they were independent companies *a rare and valuable capability
Innovators
Technology leaders Also called inventors, pioneers, first movers They are proactive For them technological innovation is a strategic weapon and thus represents an internal *strength*
Competitive strategies vs competitive advantages
strategy is the plan of action The advantage is the end goal, the purpose of the strategy
how can a firm keep growing when the whole industry is growing slowly?
Take market share away from rivals, usually by cutting prices.
Leveraged or transferred core competencies/distinctive competencies
Taking Core competency or distinctive competency developed in one line of business and applying it to another line of business
Sources of Core competencies
Tangible resources In tangible resources Capabilities in coordinating resources *As all firms have the above It's important to note that it must be a real strength In order to be a CC
Imitability rank from easiest to hardest
Tangible resources Intangible resources Capabilities
Paradigm shifts
Technological innovation begins with a scientific discovery, new technical knowledge, a invention
Technological forces
Technological innovations like cells phones create a new industry and typically destroy one or more old industries while causing dramatic changes in other industries (in this case, the advertising and wristwatch industries) and changing people's everyday lives.
SUPPORT ACTIVITIES categories
Technology development Procurement Human resource management General administration
transfer prices
the prices one division of a company charges other divisions for its products
Pressure from substitute
The ability of substitutes for the rebels product to drive rebels prices down quality and features up Resulting more competition and lower profits
bargaining power of suppliers
The ability of suppliers to demand higher prices Or provide your products Or service features
Market power
The ability to mitigate one of five forces of competition Ability to influence prices in an industry by controlling supply or demand
competitive advantage
The achieved advantage over rivals when a company's profitability is greater than the average profitability of firms in its industry.
organizational architecture
The combination of the organizational structure of a company, its control systems, its incentive systems, its organizational culture, and its human capital strategy
value chain book definition
The concept that a company consists of a chain of activities that transforms inputs into outputs.
business model
The conception of how strategies should work together as a whole to enable the company to achieve competitive advantage.
Valuable
The core competency can be used to: Exploit external opportunities Neutralize external threats The value of a core competency is measured by customers
The Firm and its Environments
The firm The industry environment The general environment
"better off" test
The firm must be more valuable than it was before the diversification, and that value must not be fully capitalized by the cost of the diversification move (i.e., the cost of entry into the new industry must be taken into account when assessing the value created by the diversification)
Increased commitments to original industry
The firm used to have 10 million of assets in a certain industry. it Now has significantly more assets dedicated to the industry or more or even more eggs in one basket
Human capital
The qualification of individual workers involving: -Skills -Expertise -Education and training -Experience It is the foundation of intellectual capital
For most companies and new technologies coming from:
The general environment -EX: Little companies you've never heard of People inventing things in their garages Brand-new start up companies Other industry's companies cannot monitor *Aren't coming from big industriesIndustries because R& D Department of dominant firms Are fat and happy therefore they don't want a change to come along and make their products obsolete
Dialectic inquiry
The generation of a plan (a thesis) and a counterplan (an antithesis) that reflect plausible but conflicting courses of action
Loss of flexibility
The larger the firm is the hardest to adapt to change If demand falls quickly or a new technology appears it is harder for vertically integrated businesses to respond than single businesses
Fixed costs of exit:
The main example is long-term contracts with raw materials suppliers, buyers, or employees that have to be honored whether the firm is still in business or not.
Mature Industries
The market is to- tally saturated, demand is limited to replacement demand, and growth is low or zero barriers to entry increase, and the threat of entry from potential competitors decreases To survive the shakeout, companies begin to focus on minimizing costs and building brand loyalty surviving companies are those that have secured brand loyalty and efficient, low-cost operations. This creates a significant barrier to entry, and diminished threat of entry As a result of the shakeout, most industries in the maturity stage consolidate and become oligopolies
Network effects
The network of complementary products as a primary determinant of the demand for an industry's product. ex: the demand for automobiles early in the 20th century was an increasing function of the network of paved roads and gas stations as an increasing number of people acquired telephones and the network of wires and switches expanded, the telephone connection gained value
Social capital
The network of relationships among the knowledge workers inside and outside of the firm It is critical to retainingKnowledge workers *Knowledge workers have more loyalty to their colleagues and profession then to their employer
Business level strategy
The plan for how to compete in a given industry with the purpose of: Gaining competitive advantage Protecting against the five forces of composition Occupying a defendable position *Also called competitive strategy
THE MARGIN
The point (difference between price and cost of all activities) the purpose or point of considering a value chain
Natural Limits to Technology
The point where further advances are not possible
Characteristics of a promising acquisition candidate:
The poor performer must have a low market to book the value so that it can be acquired a reasonably cheap price It must be possible for good management to turn the poor performance around *Nothing to fix his business don't try When performance improves there has to be a likelihood of selling a poor performer for more than the acquisition price *Buy low and sell high
capital productivity
The sales produced by a dollar of capital invested in the business.
Premise of multi industry corporate level strategies: Bureaucratic (Running of an organization) Costs
The strategies add bureaucratic cost to Business units -Corporate overhead -Communication/coordination -Lost independence *A successful strategy must create more benefits than cost
market segmentation
The way a company decides to group customers, based on important differences in their needs, in order to gain a competitive advantage
cognitive biases
The way we process information and reach decisions
Market segmentation: segmentation approach
There are boundaries See many market segments with varying customer needs
What happens to a company using combination strategy is both competitive advantages are not achieved
There is a strong likelihood of poor profitability
Social forces
These are lifestyle trends and values that are chosen by individuals in a society, whereas demographic characteristics are not voluntary on the part of individuals. Examples of social trends in the U.S. are the declining marriage rate, more multi-generational households, more moms as breadwinners and stay-at-home dads, greater tolerance of different sexual orientations, and greater health and fitness awareness.
Political/legal forces
These include changing political preferences on the part of voters as well as the effects of laws and regulations, including the vigor with which they are enforced and any judicial rulings that can change their interpretation. Political and legal forces occur at the local, state, and national levels.
Undifferentiated products
These products are also called commodities. All brands look alike when products are undifferentiated. There are no differences in quality or features. The only way for customers to make a smart purchase is based on price. The company with the lowest price will win, making all companies set prices as low as possible, driving profits down.
Well-constructed goals have four main characteristics:
They are precise and measurable. They address crucial issues They are challenging but realistic They specify a time period in which the goals should be achieved"
Premise of multi industry corporate level strategies: Business units
They must help one or more business units -Adds to a competitive advantage Lowers costs Improves the differentiation *A successful strategy must improve profitability -To make sense the combined profits of multi industry firm must be greater than the sum of the profits of each line of business when separate
innovator: strategic alliance
They work best when the strategic alliance partners bringing complementary resources And or capabilities that when combined can lead to core or distinctive competencies that neither firm could achieve on its own *In this context we are assuming that the innovator has a distinctive competency related to new technology and uses a strategic alliance approach to find a partner with core competencies in the business function like operations marketing logistics or customer service with innovator is weak *If however poses a risk to the innovator because the partner company may learn how to imitate the new technology Best when: Complementary assets owned by investor- No Barriers to imitation- High
customer response time
Time that it takes for a good to be delivered or a service to be performed.
The purpose of unrelated diversification is:
To achieve hierarchical synergy -The executive at the top of the managerial hierarchy improve the performance of subsidiaries Per the book the purpose is financial synergy
The point of related diversification
To achieve operating synergies anywhere in the primary activities of value chains Should make something operations either more effective or more efficient
T/F Industries can be defined broadly or narrowly
True
T/F The cost focus or usually provides fewer bells and whistles and firms with cost leadership strategy
True The cost focus or brand maybe a stripped-down bare bones cheap version of the product or service the customers are okay with that
Shared activities
Typically involve tangible resources besides cash Must be in primary value chain activities Examples: Manufacturing plants Distribution centers Equipment Direct labor Think of how Walmart is able to use the Walmart trucks to deliver to sam'sclub stores
Why we don't study concentration as a strategy
Uncomplicated as a corporate level strategy -No decisions beyond and what single and compete -Not necessary to juggle resources among businesses
Combination strategy
Used in a broad market Having a dual strategy shooting for both cost advantage and a differentiation advantage
Focus combination strategy
Used in a narrow market Having a dual strategy shooting for both cost advantage and differentiation advantage
Innovation
Using new knowledge to transform organizational processes or create commercially viable products and services The development of something new Must be revolutionary
Shared activities
Using the same facilities equipment or workers and multiple lines of business
A core competency leads to only a temporary competitive advantage if it is:
Valuable Currently rare Easily copied
Requirements for core competency to lead to a distinctive competency and a sustainable Competitive advantage
Valuable Rare In imitable Non-substitutable V-R-I-N
pooled negotiating power
Versus suppliers -Firm buys and puts in greater volume and contentment volume discounts Versus buyers -Firm sell wider variety of outputs so buyer purchases more -Enables: Product bundling- offer discounted price on bundled products Cross-selling- Offer total solution
Three multi industry corporate level strategies
Vertical integration Related diversification (Concentric) Unrelated Diversification (Conglomerate)
Vertical integration or diversification
Vertical integration sometimes creates diversification of revenues due to the capacity matching problem
First mover disadvantages for product innovations
Very high pioneering cost due to: -R& D -Must educate buyers and supply chain High risk due to uncertainties in: - The marketplace - The new technology - Technical standards run the risk of building the wrong resources and capabilities may invest in inferior or obsolete technology -Basing its product on an early version of a technology may lock a company into a resource that rapidly becomes obsolete
Corporate level strategy questions
What industries/lines of business are we in What industry/lines of business should we be an to maximize long-term returns
Speed to market
When a company has urgent strategic need to get into an industry it takes too long to use internal new development. Use Acquisition to achieve speed to market/fast entry
law of diminishing returns
When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines. *Does not apply to tech industries
When do we consider a company vertically integrated?
When both of these conditions are true: 1. The firm has multiple lines of business upstream and downstream 2. More than 70% of revenues come from one industry so the firm is *not diversified*
virtual corporation
When companies pursued extensive strategic outsourcing to the extent that they only perform the central value creation functions that lead to competitive advantage.
When do we consider a company diversified?
When revenues are spread out among multiple industries When less than 70% of overall corporate revenues come from One industry -If accompany is making about $1 out of every $3 in sales from something outside its main business be consider the revenues to be diversified
concentrated suppliers
When the supplier industry is more concentrated than the rivals' industry, suppliers are less dependent on any one account; they can find other rivals to sell to.
When do we consider diversification related?
When there are similarities between the firm's line of business -Diversified company must have similar primary activities across value chains
Paradigm shift success depends on
Whether the innovator has the required complementary assets The likely height of barriers to imitation
credible commitment
a believable promise or pledge to support the development of a long-term relationship between companies ex: GE reduced risks by having IBM enter into a contractual agreement that committed IBM to purchase chips from GE for a 10-year period. In addition, IBM agreed to share the costs of the specialized assets needed to develop the customized chips, thereby reducing the risks associated with GE's investment.
Emotional Intelligence
a bundle of psychological attributes that many strong, effective leaders exhibit include: -Self-awareness -Self-regulation -Motivation -Empathy -Social skills"
acquisitions are used to pursue vertical integration or diversification when
a company lacks the distinctive competencies necessary to compete in a new industry A company is particularly likely to use acquisitions when it needs to move rapidly to establish a presence in an industry
Related diversification
a corporate-level strategy based on the goal of establishing a business unit (division) in a new industry that is related to a company's existing business units by some form of commonality or linkage between the value-chain functions of the existing and new business units goal of this strategy is to obtain benefits from transferring competencies, leveraging competencies, sharing resources, and bundling products, as just discussed
Unrelated diversification
a corporate-level strategy whereby firms own unrelated businesses and attempt to increase their value through an internal capital market, the use of general organizational competencies, or both
Concentration
a firm operates in a single industry
industry
a group of firms who: Fill the same customer needs In the same target market sell the same products/service *it is an abstract concept that is in the mind of the analyst
licensing
a legal contract to manufacture and distribute another firm's product in exchange for royalties on the units sold
quality as excellence
a product's design and styling, its aesthetic appeal, its features and functions, the level of service associated with delivery of the product, and so on
internal capital market
a situation whereby corporate headquarters assesses the performance of business units and allocates money across them. Cash generated by units that are profitable but have poor investment opportunities within their business is used to cross-subsidize businesses that need cash and have strong promise for long-run profitability
commonality
a skill or attribute that, when shared or used by two or more business units, allows both businesses to operate more effectively and efficiently and create more value for customers.
rivalry: oligopolies
a type of consolidated industry causes interdependence (one firms decision affects all others)
Despite criticisms, research suggests that formal planning systems:
do help managers make better strategic decisions
Corporate-level strategies
answer the primary questions: What business or businesses should we be in to maximize the long-run profitability and profit growth of the organization, and how should we enter and increase our presence in these businesses to gain a competitive advantage
Killer applications
applications or uses of a new technology or product that are so compelling that they persuade customers to adopt the new format or technology in droves, thereby "killing" demand for competing formats ex: the killer applications that induced consumers to sign up for online services such as AOL in the 1990s were e-mail, chat rooms, and Web browsers
Availability error
arises from our predisposition to estimate the probability of an outcome based on how easy the outcome is to imagine. For example, more people seem to fear a plane crash than a car accident, yet statistically one is far more likely to be killed in a car on the way to the airport than in a plane crash
industry environment (or competitive environment is sometimes called
ask environment because it is so up close and personal to the daily operations of the firm) influences how firms can attain a competitive advantage in a particular industry. Unlike the broad forces in the general environment, the forces in the industry environment are specific to a particular industry.
how buyers get bargaining power
bargaining leverage price sensitivity
Threat of entry depends on the
barriers to entry
Social complexity
based on resources and capabilities involving complex social phenomena like personal relationships and trust (within the ranks of executives or managers or employees; or between managers and employees, buyers, suppliers, the local community, or other stakeholders)
holdup
being taken advantage of by a trading partner after the investment in specialized assets has been made
which is more important S+W or O+T
both or either or S+W explains 36% of profitability variance O+T explains about 20% of profitability variance
Blue Ocean Strategy
building their competitive advantage by redefining their product offering through value innovation and, in essence, creating a new market space They describe the process of thinking through value innovation as searching for the blue ocean—which they characterize as a wide-open market space where a company can chart its own course
strategy-making process
by which managers select and then implement a set of strategies that aim to achieve a competitive advantage
Casual ambiguity
capabilities with uncertain explanations (like a control system built around teamwork; an organizational culture that maintains creativity; or a charismatic CEO leadership style). Rivals cannot copy causally ambiguous core competencies because they cannot figure out the cause-and-effect relationships.
it is not common to see firms create significant value through an internal capital market because
capital markets have become fairly efficient due to (1) reporting requirements mandated by the Securities and Exchange Commission (SEC), (2) large numbers of research analysts, (3) an extremely large and active investment community, (4) strong communication systems, (5) strong contract law
Risk capital
capital that cannot be recovered if a company fails and goes bankrupt
the best way to maximize the long-run return to shareholders is to focus on
customers and employees
company defines its domain by
deciding whether to operate in one or multiple industries
vision
defines a desired future state; it articulates, often in bold terms, what the company would like to achieve
Industry life-cycle model
dentifies five sequential stages in the evo- lution of an industry that lead to five distinct kinds of industry environment
mission
describes what the company does requires building internal Strengths and shoring up Weaknesses in order to take advantage of environmental Opportunities and mitigate Threats
strategic groups
different groups of companies that follow a strategy that is similar to that pursued by other companies in the group, but different from the strategy pursued by companies in other groups ex: in the commercial aerospace industry there has traditionally been two main strategic groups: the manufacturers of regional jets and the manufacturers of large commercial jets (see Figure 2.2). Bombardier and Embraer are the standouts in the regional jet industry, whereas Boeing and Airbus have lone dominated the mar- ket for large commercial jets. Regional jets have less than 100 seats and limited range. Large jets have anywhere from 100 to 550 seats, and some models are able to fly across the Pacific Ocean. Large jets are sold to major airlines, and regional jets to small re- gional carriers. Historically, the companies in the regional jet group have competed against each other, but not against Boeing and Airbus (the converse is also true).
Functional-level strategies
directed at improving the efficiency and effectiveness of operations within a company, such as manufacturing, marketing, materials man- agement, product development, and customer service.
since few large conglomerates have survived, those that trade at a
discount (that is, their stock is worth less than the stock of more specialized firms operating in the same industries)
Large volume also enables greater
division of labor, and productivity shoots up when workers can specialize in doing a particular task through division of labor.
Companies pursuing a strategy of unrelated diversification ____________ (have/do not have) intention of transferring or leveraging competencies between business units or sharing resources other than cash and general organizational competencies
do not have
Customer Responsiveness
doing a better job than competitors of identifying and satisfying its customers' needs
Entry barriers: Experience curve
effects are related to but not the same as economies of scale. based on the cumulative number of units produced over all time periods (that is, all time periods since the company started using the current production techniques) ex: based on experience curve effects, the amount of time you have to spend on writing business memos will fall as you gain experience over the course of this semester
The benefits of an internal capital market are limited by the
efficiency of the external capital market ex:banks, stockholders, venture capitalists, angel investors, and so on
Industry life-cycle model stages:
embryonic growth shakeout mature decline
common measures of efficiency
employee productivity capital productivity
Business-level strategies
encompass the business's overall competitive theme, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings— for example, cost leadership, differentiation, focusing on a particular niche or segment of the industry, or some combination of these.
Strategy Implementation
execute the strategies
Types of knowledge
explicit Tacit
Forecasting
extrapolating from data to project/predict a trend line
The choice of corporate-level strategies is the ________ (first/middle/final) part of the strategy-formulation process.
final
Growth
first-time demand is expanding rapidly as many new customers enter the market. industry grows when customers become familiar with the product prices fall because scale economies have been attained, and distribution channels develop
Porter's five forces model definition
five forces that determine the level of overall competition and thus the aggregate profit potential of the industry
The firm
in the center is a company surrounded by two environments, the industry environment and the general environment. Notice that the firm has porous boundaries—the edges of the Firm box have a number of open spaces where stuff can easily leak in and out.
Marketing
includes market research, advertising, promotion, pricing and quoting, selecting and managing distribution channels and other marketing tasks.
Service after the sale
includes repair of defective or heavily-worn goods and provision of parts, perhaps under warranty, and providing delivery, installation, advice, updates, or other forms of customer support (not to be confused with support activities, which serve company insiders)
Competitive Bidding
independent component suppliers compete to be chosen to supply a particular component, such as brakes, made to agreed-upon specifications, at the lowest price. At the end of the year, the contract is once again put out for competitive bid, and once again the lowest-cost supplier is most likely to win the bid
Examples of intangible resources
intellectual property skills/know how corporate reputation brand name recognition
three different ways companies can implement a diversification strategy
internal new ventures acquisitions joint ventures
Logistics capabilities
inventory control distribution
product bundling
involves offering customers the opportunity to purchase a range of products at a single, combined price
Transferring competencies
involves taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry
reasoning by analogy
involves the use of simple analogies to make sense out of complex problems. The problem with this heuristic is that the analogy may not be valid.
business unit
is a self-contained division (with its own functions—for example, finance, purchasing, production, and marketing departments) that provides a prod- uct or service for a particular market.
The general environment
is farther removed from the firm and resembles a cloud covering the industry environment as well as the firm. The general environment could also be described as an amoeba, as if no one can tell exactly what the shape is, how the shape is changing, or where the outer boundary is. too big for any organization to change it
A Strength/core competency that is V-R-I-N
is golden and will result in sustainable Competitive advantage And will stay above average
embryonic
is just beginning to develop Growth at this stage is slow because of factors such as buyers' unfamiliarity with the industry's product, high prices due to the inability of companies to leverage significant scale economies, and poorly developed distribution channels Barriers to entry tend to be based on access to key technological knowhow rather than cost economies or brand loyalty
specialized asset
is one that is designed to perform a specific task and the value of which is significantly reduced in its next-best use. ex: Imagine that Ford has developed a unique, energy-saving, electrical engine system that will dramatically increase fuel efficiency and differentiate Ford's cars from those of its rivals, giving it a major competitive advantage. Ford must decide whether to make the system in-house (vertical integration) or contract with a specialist outsourcing manufacturer to make the new engine system....
O in VRIO
is the company organized and managed in a way that enables it to exploit its rare, valuable, and inimitable resources and capture the value they produce
Strategy formulation
is the task of selecting strategies
short-term contracting does not result in the specialized investments that are required to realize differentiation and cost advantages because
it signals a company's lack of long-term commitment to its suppliers **** this is not a problem when there is minimal need for cooperation, and specialized assets are not required to improve scheduling, enhance product quality, or reduce costs
buyer has good information
knowing which rival really has the best quality and prices, Repeat purchases and frequent purchases improve the buyer's information. Buyers with good information are more persuaded by the facts than by marketing and brand loyalty.
overdiversification can
lead the company away from its key strength
quasi integration
long-term cooperative relationships with companies in industries along the value-added chain involve activities normally performed by suppliers or buyers, in place of full ownership of operations that are backward or forward in the supply chain. for example, sharing the expenses of investment in production assets or inventory, or making long-term supply or purchase guarantees. Apple's decision to invest in production equipment for its suppliers is a prime example (in the Closing Case).
environmental scanning
looking broadly at all kinds of data to detect early signals of environmental changes
environmental monitoring
looking repeatedly and in depth to identify meaning and trends
Entry barriers: switching costs
lowers the threat of entry
Strategies for Winning a Format War
make sure that there is an adequate supply of complements for its product -diversify into the production of complements -create incentives or make it easy for independent companies to produce complements (licensing) develop killer applications Aggressive Pricing and Marketing/razor & blade strategy Cooperate with Competitors License the format
Organizational design skills
managers' ability to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level
firms can have _____ # of strategies
many
strategy canvas
maps out how value innovators differ from their rivals
Competitive parity
means average performance—the firm is average, no better or worse than others.
Bargaining leverage
means the buyer has sheer clout/influence and can force rivals into lowering their prices or raising their costs.
Price sensitivity
means the buyer makes purchasing decisions based on price and is always looking for a cheaper price, by which I mean seriously trying to find a better deal, negotiating, wheedling, always checking, playing one rival against another, etc.
profit growth
measured by the increase in net profit over time A company can grow its profits if it sells products in rapidly growing markets, gains market share from rivals, increases sales to existing customers, expands overseas, or diversifies profitably into new lines of business"
mission statement has four main components:
mission vision a statement of the key values statement of major goals
results of buyer power
more competition lower profits
results of supplier power
more competition lower profits
for diversification to create value, a company's return on investing free cash flow/ ROIC to pursue diversification must:
must exceed the value shareholders would reap by returning the cash to them
escalating commitment
occurs when decision makers, having already committed signi cant resources to a project, commit even more resources even if they receive feedback that the project is failing
In some mature and declining industries rivalry is higher and overall profitability is lower because
of high exit barriers that keep weak firms in the industry. Without these weak firms, supply and demand would be in a more favorable balance for the stronger firms in the industry
diversified company
one that makes and sells products in two or more different or distinct industries (industries not in adjacent stages of an industry value chain, as in vertical integration)
EBIT (earnings before interest and taxes)
operating income
Entry barriers: differentiation
opposite of perfect competition leads to customer loyalty to the extent that rivals have successfully differentiated their products, newcomers must spend a lot to get buyers to try a new brand
Threat of entry and barriers to entry are _____ (same/opposites)
opposites When one goes up, the other goes down.
Advantages of acquisition over new ventures
overcome industry entry barriers Speed to market/fast entry Obtain a complementary core competencies/distinctive competency Keep up with industry consolidation Avoid pioneering cost, risk of innovation Only way to achieve horizontal integration Only way to add unrelated businesses
examples of intellectual property
patents trade secrets proprietary technology copyrights trademarks
A Strength/core competency that is valuable and rare but possible to copy or substitute around tends to:
pays off in above average profitability until enough companies copy it
Strategy Formulation
picking the most appropriate strategies for the situation
razor and blade strategy
pricing the product (razor) low in order to stimulate demand and increase the installed base, and then trying to make high profits on the sale of complements (razor blades), which are priced relatively high
CEO
principal general manager
R&D capabilities
product innovation capability process innovation capability product development capability
capabilities
proficiencies in the coordination/organization/integration/management of multiple resources
Strategies directly affect
profitability
principal drivers of shareholder value
profitability and profit growth
a company's corporate-level strategies should be chosen to
promote the success of its business-level strategies
Broad market strategies
provide features attractive to most buyers -Even though not all will be willing to pay a Price premium for differentiation
Mission Statement
provides the framework—or context—within which strategies are formulated involve: Business definition Values"
When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes:
quality as excellence quality as reliability
Efficiency: simplest measure of efficiency is
quantity of inputs required to produce a given output
Variable costs
raw materials and direct labor depend on the volume of outputs in a given time period; higher sales require more raw materials and direct labor. Variable costs are counted in COGS (cost of goods sold) and determine the gross profit margin (GPM).
Dominant design
refers to a common set of features or design characteristics
Operations
refers to changing the raw materials into finished goods for sale, including production, assembly, packaging, equipment maintenance, and facility operation
General administration
refers to general management (including the creation and maintenance of the organization structure, control systems, and culture), planning, finance, accounting, legal affairs, government relations, and quality control.
Outbound logistics
refers to supply chain management/logistics (including order processing, warehousing, security, distribution, and inventory control) for the manufacturer's finished goods.
Inbound logistics
refers to supply chain management/logistics (including transportation, warehousing, security, and inventory control) for raw materials coming into the firm
prior hypothesis bias
refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make deci- sions on the basis of these beliefs, even when presented with evidence that their beliefs are incorrect Moreover, they tend to seek and use information that is consistent with their prior beliefs while ignoring information that contradicts these beliefs.
Procurement
refers to the purchasing of whatever is needed throughout the value chain, including raw materials for production, catering for the annual company picnic, hardware and software, office equipment, buildings, a corporate fleet of cars and/or trucks, and anything else.
Fixed costs
rent, utilities, marketing, R&D, management salaries, etc. are constant in a given time period regardless of whether the volume of outputs is higher or lower than expected.
Restructuring
reorganizing and divesting business units and exiting industries to refocus upon a company's core business and rebuild its distinctive competencies
functional capabilities
require managing multiple resources inside and outside the business function.
path dependency
resources and capabilities that were developed or accumulated over a period of time (like brand name recognition, corporate reputation, and the organizational culture). Rivals cannot clone these core competencies because rivals cannot re-create the unique series of historical events and personalities along the path of their development.
When a company's successful business model is generating free cash flow and profits, managers must decide whether to
return that cash to shareholders in the form of higher dividend payouts to invest it in diversification
representativeness
rooted in the tendency to generalize from a small sample or even a single, vivid anecdote This bias violates the statistical law of large numbers, which states that it is inappropriate to generalize from a small sample
Cost advantage
same benefits as other brands lower price
Financial measures that matter the the most for corporate level strategies
shareholder returns, especially 5-year cumulative total return and 1-year total return
efficiency frontier
shows all of the different positions that a company can adopt with regard to differentiation and low cost, assuming that its internal functions and organizational arrangements are configured efficiently to support a particular position
strategic role of functional-level managers
sphere of responsibility is generally confined to one organizational activity develop functional strategies in their areas that help fulfill the strategic objectives set by business and corporate-level general managers provide most of the information that makes it possible for business- and corporate-level general managers to formulate realistic and attainable strategies because they are closer to the customer than is the typical general manager, functional managers may generate important ideas that subsequently be- come major strategies for the company (therefore its important for general managers to listen to them)
values
state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build
A company can pursue multiple strategies as long as:
strategic managers have weighed the advantages and disadvantages of those strategies and arrived at a multibusiness model that justifies them ex:Sony
Decentralized Planning
successful strategic planning encompasses managers at all levels of the corporation Much of the best planning can and should be done by business and functional managers who are closest to the facts
suppliers' product or labor/skills
supplier's products or services are: Differentiated Have high switching costs Have no substitutes Important the quality of rivals products
Competitor intelligence gathering
systematically collecting data about competitors (their abilities, motivations, and probable moves) to learn how best to attack them can be susceptible to unethical practices
leveraging competencies
taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry
PRIMARY ACTIVITIES
tasks that are directly involved with transforming the firm's inputs into outputs activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service.
SUPPORT ACTIVITIES
tasks that are only indirectly involved with transforming the firm's inputs into outputs. Examples are accounting and human resource management. each support activity applies to all of the primary and the other support activities in the firm.
examples of know how
technical marketing logistics HRM customer services
bargaining power of buyers
the ability of buyers to demand lower prices or more expensive product/service features
turnaround strategy
the ability of the top managers of a diversified company to identify inefficient, poorly managed companies in other industries and then acquire and restructure them to improve their performance—and thus the profitability of the total corporation
aggregate profit potential
the average profits of all firms (Since it's an average, some firms (those with a competitive advantage) have higher profits and some firms (those with a competitive disadvantage) have lower profits)
Strategic outsourcing
the decision to allow one or more of a company's value chain activities or functions to be performed by independent specialist companies that focus all their skills and knowledge on just one kind of function, such as the manufacturing function, or on just one kind of activity that a function performs
Paradigm shifts appear to be more likely to occur in an industry when :
the established technology in the industry is mature, and is approaching or at its "natural limit." Second, a new "disruptive technology" has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology
Rivalry: High strategic stakes - Strategic interrelationships
the firm must operate in a given industry for strategic reasons. This makes it a particularly fierce or exasperating rival for everyone else. When a firm operates in Industries A and B but uses its operations in Industry A primarily to support its bigger, more important operations in Industry B, the company may be willing to suffer poor profits or fall below breakeven in Industry A.
business or line of business
the firm's operations in a given industry or market
first mover
the first to develop revolutionary new products
The principal general manager at the business level, or the business-level manager, is
the head of the division
Three interrelated environments should be examined when undertaking an exter- nal analysis:
the industry environment in which the company operates the country or national environment the wider socioeconomic or macroenvironment
Rivals
the industry we want to analyze to find its degree of competition (also profit potential as well as opportunities and threats in the industry environment).
The only successful strategies (for SWOT) fall at
the intersection of the two sets (the hatched area)
Diversification
the process of entering new industries, distinct from a company's core or original industry, to make new kinds of products that can be sold profitably to customers in these new industries.
Internal new venturing
the process of transferring resources to, and creating a new business unit or division in, a new industry
profitability
the result of how efficiently and effectively manag- ers use the capital at their disposal to produce goods and services that satisfy customer needs
diversification discount
the stock of highly diversified companies is valued lower, relative to their earnings, than the stock of less-diversified companies
the illusion of control
the tendency to over- estimate one's ability to control events
scholars have criticized the formal planning model for three main reasons:
the unpredictability of the real world the role that lower-level managers can play in the strategic management process (too much importance is attached to the role of top management) the fact that many successful strategies are often the result of serendipity (by beneficial chance), not rational strategizing *These become emergent strategies*"
value
the utility of the firms goods and services to customers what the firms outputs are worth measured by whatever each customer would be willing to buy
value and profitability: profitability depends on 3 factors
the value customers place on the company's products the price that a company charges for its products the costs of creating those products.
Buyer group more concentrated
there are few buyers, many rivals, and buyers can find alternative sources for their raw materials
essential purpose of the external analysis
to identify strategic opportunities and threats within the organization's op- erating environment that will affect how it pursues its mission
Innovator: go at it alone
to succeed with this approach, the innovator must have complementary assets and a DC related to the new technology (that is "V" and "R" and "I".) The required complementary assets to launch a product innovation would include tangible resources (like enough production facilities and cash to meet fast-growing demand) and intangible resources (like marketing know-how and contracts with distribution channels). The required complementary assets to launch a process innovation would include tangible resources (like sufficient production facilities to meet demand while switching over to the new process) and intangible resources (like know-how in training employees so they could learn the new process). Best when: Complementary assets owned by investor- Yes Barriers to imitation- High
Federal Trade Commission (FTC) & the Department of Justice (DOJ)
two government agencies that help to enforce antitrust laws. They are concerned about the potential for abuse of market power
Leverage/transferred core competencies
typically involve intangible resources or capabilities Must be in primary value chain activities Examples: Functional know-how or capabilities Brand name Proprietary technology
how to cope with forces in the industry environment
use proactive management -bargain, negotiate with stakeholders -exert as much influence as possible -figure out ways to gain more influence *Try to avoid reactive management
Competitive advantage is based on
value added for customers
organizational culture
values, norms, and standards that control how employees work to achieve an organiza- tion's mission and goals
operating profit margin (OPM)
variable costs and fixed costs together
there are several reasons why mergers and acquisitions may fail to result in higher profitability:
very different company cultures; high management turnover in the acquired company when the acquisition is a hostile one; and a tendency of managers to overestimate the potential benefits from a merger or acquisition and underestimate the problems involved in merging their operations
key characteristics of strong strategic leaders that lead to high performance:
vision, eloquence, and consistency articulation of a business model commitment being well informed willingness to delegate and empower astute use of power emotional intelligence
cross-selling
when a company takes advantage of or leverages its established relationship with customers by way of acquiring additional product lines or categories that it can sell to them
High storage costs
when a product is difficult to store or losing value as it sits in inventory. Industries with high storage costs make products that are naturally perishable (such as foods or hazardous chemicals), prone to go obsolete (such as consumer electronics or fashion clothing), or extremely bulky.
unethical practices
when companies sometimes go overboard in their zeal to obtain competitor data spying, stealing information, bribery, and deception.
superior quality
when customers perceive that its attributes provide them with higher utility than the attributes of products sold by rivals.
Economies of scope
when one or more of a diversified company's business units are able to realize cost-saving or differentiation synergies because they can more effectively pool, share, and utilize expensive resources or capabilities such as skilled people, equipment, manufacturing facilities, distribution channels, advertising campaigns, and R&D laboratories
tapered integration
whereby the firm makes some input and buys some input. Purchasing part or most of its needs for a given input from suppliers enables the firm to tap the advantages of the market. At the same time, meeting some of its needs for input through internal production improves the firm's bargaining power by reducing the likelihood of holdup by its supplier
A Strength/core competency that is rare and inimitable will/will not improve profitability
will not improve profitability *unless it is valuable to customers*
Mobility barriers
within-industry factors that inhibit the movement of companies between strategic groups. They include the barriers to entry into a group and the barriers to exit from an existing group.
