MGMT4010 - Strategic Management Exam 1

Identify Key "Jobs-To-Be-Done" Through Customer Discovery & Empathy

"People don't want to buy a quarter-inch drill... ...they want a quarter-inch hole!" - Theodore Levitt Solution --> Job What? --> Why? Look for jobs that are important, unmet, and widely-held

IBISWorld (Porter's 5 Forces Research)

A comprehensive collection of detailed industry research reports Industry reports include industry analysis, outlook, products and markets, market segments, supply chain, major players, competitive landscape, operating conditions, key statistics, and more

Specialization of Equipment

A firm with high volumes can purchase and use specialized equipment or tools that smaller firms simply cannot afford or otherwise justify

Different Business Model Example

- Reconfigure the Value Chain - Eliminate Value Chain Activities - Eliminate Retail Stores - Amazon.com (vs Barnes & Noble)

Some Key Principles of Toyota's production system:

- Use a "pull" system: to avoid overproduction - Just-in-time delivery: to reduce inventories - Level out the workload: to smooth production - Use visual controls: to illuminate problems and reduce defects - Find the bottleneck: to increase productivity - Finally, their corporate culture prizes, rather than punishes, learning from mistakes

Sources of Cost Advantage

1. Economies of Scale 2. Learning and Experience Effects 3. Proprietary Knowledge Savings 4. Lower Input Costs 5. Different Business Model

Strategic Implications of the Scale/Experience Curve

1. Growth strategy 2. Pricing strategy 3. Acquisition strategy 4. Benchmarking analysis

Four Differentiation Sources

1. Superior Features 2. Better Quality 3. Convenience 4. Brand/Image

A Good Strategy Answers Four Questions

1. Where do we compete? 2. What unique value do we bring? 3. What resources/capabilities do utilize to bring this value? 4. How do we sustain our unique value?

Risks of Focus Strategies

A competitor focusing on an even more narrowly defined market segment and achieving greater differentiation and/or cost savings Industry-wide competitors decide to focus on specific customer segments through an expanded product line The differences are reduced between the needs of a specific market segment and those of the rest of the industry resulting in a lower customer value for the focused offering

Risks of Cost Advantage

A loss of cost advantage to competitors due to newer technologies A change in customers' needs that results in customers no longer finding your cost leader product "good enough" Customers decide that the value difference between your cost leader product and a differentiated product is no worth the cost savings Competitors finding a way to imitate the cost leader's advantage through their own unique (different) strategic actions

Economies of Scale

A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases 1. Spread Fixed Production Costs 2. Spread Nonproduction Costs 3. Specialization of Equipment 4. Specialization of People

Economies of Scale (Definition)

Additional economies possible through additional scale Lower costs per unit due to additional efficiencies (economies) possible through additional scale of operations Note: Scale is defined by an arbitrary but consistent for comparison time period: e.g., units per month

Risks of an Integrated Strategy

All of the risks of differentiation and cost leadership strategies plus... The cost leader's product becoming better thereby reducing the firm's differentiation advantage The differentiation leader's product becoming cheaper thereby reducing the firm's cost advantage

Scale Spreads Fixed Costs

As scale increases, fixed costs are spread across more units To offset the cost of purchasing production equipment with its per unit cost savings, a minimum scale must be reached - Thus, firms with less scale cannot take advantage of the equipment - Production investment is often "lumpy" with equipment geared towards a certain range of units produced Nonproduction costs such as R&D, advertising, distribution, finance, and administrative are also spread out more as scale increases

Specialization of Tasks and People

As scale increases, so can the number of employees which allows them to specialize in specific tasks Rather than a single person making, marketing, selling our lemonade, and keeping up with administrative tasks, we could have an employee for each area Specialization allows for increased productivity through experience and/or education

Capital IQ (Competitive Advantage Research)

Available to current Tulane students, faculty, and staff

Semiconductor Experience Curve

Average Decrease in Cost with Doubling of Cumulative Volume = 20.2%

Customer Segmentation

Customer segmentation is the analysis of customer needs to identify groups of buyers who are similar in the way they discriminate among (and value) product or service offerings Purpose: Maximize profit and market share Over-satisfying customer segment needs reduces profit Under-satisfying reduces market share

Cost Advantage

Customers will buy our product because it costs less than competitors

Differentiation Advantage

Customers will buy our product because it is different (better) than competitors

When a firm reduces its costs below its competitors:

Beating competitors' prices will increase market share or Matching competitors' prices will increase profits

Better Quality

Better quality, more reliable, longer lasting, etc. E.g., Toyota, Honda Better Quality --> Better Customer Value

Multi-Industry Strategy

Blurring industries Cooperative strategies Entering a new business Corporate strategy

Brand/Image

Brand associated with lifestyle, status, happiness, beauty... E.g., Harley-Davidson, Coca-Cola, Tiffany

Fundamental Strategies of Business (Chart)

Broad - Distinctiveness = Differentiation Advantage Narrow - Distinctiveness = Focused Differentiation Advantage Broad - Cost = Cost Advantage Narrow - Cost = Focused Cost Advantage

Single Industry Strategy

Business strategies Scale matters Defining industry Competitive rivalry External environment Government intervention

What Is Business Strategy?

Business strategy is the plan on how the company will profitably(1) and sustainably(2) achieve the vision for the company 1. If the company runs out of money, everyone is laid off, the company closes, and the vision for the company is never achieved 2. The plan for achieving the vision for the company should be sustainable over time and not dependent on short-term factors or continuous influxes of investor capital and prevent competitors from copying it and stealing all your customers...

Customers will buy our product because it is different (better) than competitors (differentiation advantage)

But customers must be willing to pay a price increase that is more than what it costs us to create that difference focus strategy

Customers will buy our product because it costs less than competitors (cost advantage)

But this requires us to lower our own costs below that of our competitors cost advantage strategy and differentiation advantage = hybrid

Why Economies Of Scale Matters

Buyers and Suppliers: Economies of scale is fundamentally how 'volume discounts' work, so scale can impact your company through its buyers and suppliers as well as directly Kickstarter and Indiegogo primarily exist to help firms achieve a large enough scale (through preorders) to achieve low enough prices to sell their products successfully against existing competitors that already have at least some scale

Fitch Connect (aka BMI Research) (Porter's 5 Forces Research)

Contains global industry reports with a focus on forecasting It includes country risk and financial market reports on industries ranging from automotive to telecommunications Geographic regions covered: Africa, Asia, Caribbean, Europe, Latin America, Middle East, and North America; reports are further divided by country

Strategic Decision Makers

Corporate governance Ethics & Scandals How big is too big?

Fundamental Strategies of Business

Differentiation Advantage Cost Advantage

Differentiation

Differentiation is making a product or service different (better) from the competition in one or more ways that increases the value to the customer so that they are willing to pay a higher price with the goal that the increase in price is more than the cost to create the difference

Understanding Customers

Differentiation strategies require a deeper understanding of the customer's needs than cost-based strategies This typically requires: Customer segmentation analysis Consumption chain analysis

Pursuing an Integrated Strategy

Differentiator --> Integrator --> Cost Leader

Superior Features

Do a job better. e.g., Dyson Do a unique job. e.g., Build-a-Bear Do more jobs. e.g., iPhone

Job-to-be-Done

Entertainment Transportation Safety Bragging Rights

Primary ways to cost advantage with lower-cost inputs:

Exercising Strong Bargaining Power Over Suppliers (e.g., Walmart) Cooperating Especially Well With Suppliers (e.g., Toyota) Getting Inputs From Low-Cost Locations (e.g., Nike) Arranging Better Access To Inputs Than Other Firms (e.g., DeBeers)

How Focus Strategies Work

Firms can create value for a specific segment of the market if focusing allows for increased differentiation and/or lower costs To be successful, firms must have the core competencies required to provide better value/price to the specific segment than competitors serving the entire industry

Risks of Differentiation

Firms can't sufficiently differentiate a product to create value for which customers will pay a premium price Customers decide that the value difference between the differentiated product and the cost leader's product are no longer worth price difference Counterfeiters offer a cheap "knockoff" of a differentiated good or service which potentially significantly changes the value/price differences The competitive advantage won't last without "barriers to imitation" which are created by firms developing unique resources and capabilities (e.g., recognized brands, R&D intensive features, patents, distribution networks, etc.)

Focus Strategies

Firms choose a focus strategy to better serve the needs of a specific customer segment or industry segment: 1. A particular buyer group (e.g., single moms or affluent seniors) 2. A particular segment of a product line (e.g., products for professional painters or do-it-yourselfers) 3. A particular geographic market

Scale Allows Specialization

Firms with small volume cannot support high levels of employee specialization - This lack of expertise and/or experience reduces task efficiency Alternatively, they do hire specialists without enough work to keep them busy - reducing payroll efficiency Similarly, a firm with high volumes is able to purchase and use specialized equipment or tools that small volume firms simply cannot afford

Growth Strategy

First movers in a fast-growing market will secure a widening cost advantage Firm's must grow as fast, or faster, than rivals or be at a cost disadvantage. This is behind the "be #1 or #2 or exit" philosophy

Scale Spreads Out Costs

Fixed production costs are less per unit when spread over more units E.g., A factory building's rent is the same for 1 unit or 10,000 units Similarly, nonproduction costs such as R&D, advertising, finance, and administrative costs can be spread over more units

Factiva (Competitive Advantage Research)

Full-text coverage of newspapers, periodicals, and other sources of business and general news, plus company reports, industry reports, and financial data compiled by Dow-Jones and Reuters Note: Factiva allows for a maximum of 8 concurrent users

Factiva (Porter's 5 Forces Research)

Full-text coverage of newspapers, periodicals, and other sources of business and general news, plus company reports, industry reports, and financial data compiled by Dow-Jones and Reuters Note: Factiva allows for a maximum of 8 concurrent users

A Milkshake Doing Different Jobs

Functional Job: Yummy treat Social Job: Appease my kids Emotional Job: Commute companion

Discovery

Get the job done by providing a solution that offers greater simplicity, convenience, cost, and access

Career Strategy

Good strategy is a decision that makes a thousand other decisions for you But not every strategy is successful

Limitations of the Experience Curve

Growing market share can move a firm down the experience curve but does not guarantee substantial cost advantages - What is the cost of market share? - Learning curve flattens with high experience "Spillovers" of knowledge to rivals lower their costs of learning (e.g., a more efficient process becomes an industry 'best practice') Aging equipment can impede continued learning and cost advantages

Hoover's Company Profiles (Competitive Advantage Research)

Hoover's features company profiles, industry information, and profiles of key executives Profiles include a company overview, detailed history, officers and board members, competitors, products and operations, auditors, rankings, industry information, and historical financials

Differentiate in the Consumption Chain

How do consumers become aware of a need for (benefit of) your type of product (or service)? How do consumers find your offering? What is your product really used for (what "job" does the consumer want done)? How do consumers make their purchase selection (priority of attributes)? How is your product ordered? paid for? delivered? How is your product repaired? serviced? disposed of? Can you make one of these easier or better for the customer?

Focus Strategies Explain

How focusing on the right customer segment can give you additional differentiation or cost advantages... leading to greater profits

Hybrid Strategies Explain

How integrating differentiation and cost advantages... can create a profitable market niche

Cost Advantage Explains

How to make competitors cry about your low prices as you gain greater market share or profit margins

Differentiation Explains

How to provide unique value that will make customers happy to pay a premium price for a product or service

Integrated Strategy Example

Hyundai's Genesis is an excellent example of providing "affordable luxury" compared to BMW's 5-Series

Example: Scale Economies In Advertising

In 2018, Coca-Cola $5.8 billion on global advertising, dwarfing its next rival PepsiCo by nearly $2 billion in spending

Lower Input Costs

Inputs: Resources such as people, raw materials, energy, information, or financing that are put into a system to obtain a desired output

Strategy Is Not A Vision Statement

Many companies have a stated "strategy" which is actually a vision statement the word 'strategic' or 'strategy' included Others are little more than a collection of business buzzwords While ambitious (internet for the third world) or lofty (free shoes for the poor) statements have a place in business, they are a (usually future) vision for the company that does not say anything about how it will be achieved

Mintel (Porter's 5 Forces Research)

Mintel Reports: covers brands, companies, markets, consumers and trends - Each report combines data and analysis of the competitive landscape, market-share analysis and consumer profiles Mintel Market Sizes: global market data including market size, share and segmentation data

Convenience

More convenient to find, purchase, use, etc. E.g., Starbucks, Coca-Cola

"Production is hell" - Elon Musk

Musk had a blunt answer when asked about quality control issues: "It took us a while to kind of iron out the production process Friends ask me: 'When should I buy a Tesla?' And I'm like: 'Well, either buy it right at the beginning, or when the production reaches a steady state. During that production ramp, it's super hard to be in vertical climb mode and get everything right on the little details." Paint issues also cropped up in December, Musk said, in the push to produce as many cars as possible before year's end "One of the things that was happening when we were ramping production was the paint wasn't necessarily drying enough," he said. "So, it's like, if you go faster... it's like, you just discover these things. Like, If we knew them in advance, we would fix them in advance."

Cost Advantage/Leadership Strategy

Offer lower-cost products with competitive levels of features and quality (must be "good enough") These products (or services) are usually no-frills, standardized products for typical customers Focuses on efficiency so costs are lower than competitors' costs

Strategy also shows how you will not get from here to the vision (Prof. Kuban)

Often, knowing what not to do is as helpful as knowing what to do "You Can Do Anything, But Not Everything." - David Allen, the creator of the Getting Things Done

Lower Costs With Learning/Experience

People get faster with repetition (human learning) People figure out faster ways to do things (process learning) People identify repetitive tasks that could be replaced with machines (automation learning) People identify changes in product design that could reduce manufacturing time and/or input material waste (design learning)

Buying (Empty) Status

People tend to buy HERMES boxes and bags, while PANDORA and TIFFANY are also popular

Ways to Segment the Market

Product Attributes Customer Demographics Job-to-be-Done

Pricing Strategy

Provides a basis for planning future prices and pricing for a specific production run or contract Also, used for predicting future market share / pricing trade offs

Diamonds are BS

Read article

Business Insights: Essentials (Competitive Advantage Research)

Research and analyze companies and industries around the world. Includes reference content from Gale's core business collection, company and investment research reports, industry rankings and surveys, profiles, market share data, and company histories

Disadvantages of Scale

Scale may become a disadvantage during economic downturns Firms cannot spread fixed costs as much when demand declines forcing lower production volumes Firms with heavy fixed assets can respond to this concern by: - Shifting more of their cost structure from fixed cost to variable cost (e.g., outsourcing to make costs more variable) - Diversifying into other areas of businesses or industries that are countercyclical

Benchmarking Analysis

Scale/Experience curves can be plotted for a firm and its competitors to assess how well each company is managing its costs Companies that fall above the regression line may not be managing costs well

Acquisition Strategy

Scale/Experience curves provide data on how much costs will likely decrease (cost synergies) if two firms combine their volume/scale

Product Attributes

Speed Battery Life Weight Flavor

Strategy vs. Tactics

Strategies, compared to tactics, take a significant amount of time and resources, and therefore can not be reversed quickly The rule of thumb is a year or more to change. For instance, transferring universities would be a strategic move while changing classes would be a tactical move

Strategy Definition - Richard Rumelt, Good Strategy / Bad Strategy

Strategy contains three elements: 1) A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often-overwhelming complexity of reality by identifying certain aspects of the situation as critical. 2) A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. 3) A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy

Strategy Definition - Prof. Kuban

Strategy is how you get from here to the vision

Since not every strategy is successful

Strategy is how you plan get from here to the vision (Prof. Kuban)

Strategy is how you plan get from here to the vision (Prof. Kuban)

Strategy is how you plan to achieve your long-term vision. Tactics are day to day plans and actions to achieve goals (hopefully) in line with your strategy

Delightfully Different

Successful differentiators create offerings that "delight" customers ("that was awesome") Delight and awesome products come from doing something unexpected or surprising... perceptively better than competitive offerings Delight can even create customer advocates for your product and/or brand

Reinforcing Differentiation

The more points of differentiation the better as they can be reinforcing and make imitation more difficult E.g., a conveniently located, recognized brand associated with happiness, that arguably tastes better

Lower Costs With Proprietary Knowledge

Toyota's production system is a very successful, but very difficult to imitate due to multiple internal processes and a culture to support it

Empathy

Understand customer functional, social, and emotional jobs-to-be-done

Integrated Cost Leadership/Differentiation Strategy

Using this hybrid strategy firms either: Provide relatively lower cost products with some valued differentiated features over the cheapest products Produce "almost as good" differentiated products at lower costs than the comparison differentiated products

The Law of Experience

Variable and average (variable + fixed) costs per unit decline by a constant percentage (typically 10-30%) each time cumulative output doubles From great experience comes... savings!

Strategy Frameworks

What is strategy? Industry differences Company differences

Customer Demographics

Young Professionals Retired Couples Working Parents College Athletes

Strategy Definition - Michael Porter, Competitive Strategy: Techniques for Analyzing Competitors

[Strategy is] a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals. Strategy is about the creation and capture of value

Strategy Definition - A.G. Lafely and Roger Martin, Playing to Win: How Strategy Really Works

[Strategy is] an integrated set of choices which position a business in its industry so as to create sustainable advantage and superior returns