Strategic Management Exam 2

Resource Based View (RBV)

is how firms achieve the following questions: • How does a firm provide the buyer with greater value, a more favorable exchange value, or the best combination of both? • What is it about firm A that is more attractive than any of the alternatives? • These questions are found in the organizational side of the strategic analysis. Her Notes:

Resource Based View (RBV) -- Her Notes

** REVIEW SLIDE 11 of Lecture 1 Chapter 5 PDF - Firms are constantly seeking to gain advantage - Firms must appear more attractive than other options - Firms make deliberate decisions of assets and resources in the following areas: Procurement Development Deployment - The RBV holds that competitive advantage emerges from resources that meet four criteria: -- Value -- Rarity -- Inimitability -- Non-substitutability My Notes From the Book: - have to appear more attractive than any other options available in the eyes of the customers ad thereby getting customers to spend money for their products and services - this basic contest--between rival firms for individual transactions--lies at the very heart of the strategy - it is the ability to win these basic contests, over and over again, which drives a firm's performance and ultimately determines its success - to win these basic contests, a firm must make deliberate decisions about the: -- procurement -- development & -- deployment of its resources - as firms that meet the four criteria of the RBV, they are able to provide greater consumer surplus through either creating better use value or providing better exchange value, or both - as a result, they are able to generate more and more profitable transactions, which lead to better performance

Concluding Thoughts and Caveats -- Stuck in the Middle (Her notes and My notes)

- All purchases reflect a desire that customers want to increase their surplus - either use value or total cost - Combinations of Two generic strategies - All strategies of differentiation or low cost have some element of the other in the strategy. - Significant amounts of the other strategy in the combination is a Shift in the Production Frontier. -- A firm can choose to focus either exclusively on differentiation or exclusively on low-cost... (READ PAGE 158-159 about PPF IN BOOK AND CORRELATE IT WITH THE GRAPH) -- Firms can choose to concentrate almost entirely on differentiation or on low cost--(a firm could decide to compete mostly on differentiation but also make some effort to reduce costs) but because resources are finite and typically suited for particular uses, it is not possible to focus fully on differentiation while focusing fully on costs -- differentiated producers do this all the time, by offering incentives or discounts for their products and services or by providing special financing, extended warranties, or additional services at no extra cost -- efforts such as these exemplify attempts to mitigate the full cost of the product or service's premium price--as a result, they represent combinations of differentiation and low-cost strategies -- in the same way, a firm focused mostly on low-cost can add some aspect of differentiation, still -- This phenomena can be seen (shift in the PPF) when new technology, new models, new inputs, or new methods impact the strategy. - Stuck in the middle - -- Trying to be all things to all people, both differentiated and low-cost -- Similar to blue ocean, but done poorly. Stuck in the Middle - A concept of having a strategy between the most differentiated and lowest cost options. -- Can be thought of a difficult strategic place to be, but it may be OK in certain environments. -- Possible to be the lowest cost or most differentiated in specific markets, getting some customers at a specific time. - "All competition is local," My Notes: - Porter's contention that no firm could succeed for long in a position that was in between the most differentiated provider and the lowest-cost provider--such firms were said to be "stuck in the middle" and so at a persistent disadvantage to those competitors who offer greater use value as well those who offered lower transaction costs - There still remains considerable confusion about what it means to be stuck in the middle and whether or not firms can be successful when so positioned - To help understand this issue, it is important to remember 2 key principles 1) All competition is local -- a firm must be "stuck" between other real competitors, operating within the same space and competing for the same customers -- herein lies the confusion: simply because a firm is not the lowest-cost provider anywhere does not meant that it cannot be the lowest-cost provider for some group of customers and for some subset of the market -- in the same way, just because a firm is not the most differentiated among all providers does not meant that it is not the most differentiated for some group of customers or some subset of the market -- firms that are neither (most differentiated or lowest-cost), may still hold strong CA by being the most differentiated or lowest-cost providers within specific markets 2) All purchases reflect the desire by consumers to increase their surplus, which is a function of both use value and total cost -- thus, every purchase reflects a trade-off of sorts between high use value and the higher costs often associated with it and low use value and lower costs often associated with it -- every strategy reflects some combination of differentiation and low cost -- indeed, there are no purely low-cost strategies--even among low-cost providers, there is typically some effort made at adding value, to provide some qualitative differentiation to the product and to reduce elasticity of the buyers (same goes for differentiation strategies) - Viewing strategies as combinations of low cost and differentiation allows us to see a near finite number of positions along the continuum between the two and to position firms, in relation to one another, along this continuum - Every firm's strategy can be seen as a combination of some low-cost and some differentiation elements - Which combination ultimately yields CA, though, i a function of how that strategy fits with the specific contours of the environment in which the firm is competing

Concluding Thoughts and Caveats -- Dynamic Capabilities (Her notes and My notes)

- Assets are not valuable until they are desired by customers. - Customers will not continuously find assets valuable - Competitive advantage is an ongoing process of learning and change. My Notes: - CA is not a characteristic of the firm, nor is it a commodity that can be simply bought or sold - Firms do not acquire CA and then never lose it, nor do attractive positions in an industry remain attractive indefinitely - CA is the result of a dynamic and ongoing process - Demand is constantly shifting and adapting as competitors move into and out of various markets - Firms innovate and competitors imitate, thereby creating new and refined alternatives from which customers can choose - Thus, there is an ongoing ferment of activity, some purposeful and some accidental, some driven by forces in the environment and some driven by the actions of the firm - It is in the midst of this ferment that the firm must position itself, its products, and its services, so as continually to offer value to the customers - The resources that are the most valuable over the long term are those that are the most flexible, offer the most opportunity for adaptation, and can change along with the conditions of the environment - Even strong advantages can erode, through the actions of competitors and with the changing tastes of the market - The only means of gaining advantage must come from the ability to move faster, to experiment and implement more efficiently and effectively, and to respond quicker to changes in the market

Qualifications and Explanations (Blue Ocean Strategy)

- Blue Ocean Strategy - combination of the differentiation and low-cost leadership - Difficult to accomplish due to the trade off of one strategic position over the other. - Aspects are value creation using differentiation and low-cost complement each other to achieve an untapped market space for additional demand. Four questions need to be answered to implement the blue ocean strategy: 1) Which factor the industry takes for granted can be eliminated? 2) Which factors should be reduced below the industry 3) Which factors should be raised above the industry standard? 4) Which factors should be created that the industry has never had? - How do we create value innovation? Doing things very differently from the industry.

Performance related to Differentiation and Low-Cost (Her Notes and My Notes)

- Both strategies can create competitive advantage, the context will be the driver - Operations will be different for each strategy - Financial success will also be different for each strategy. - Low Cost generally foci is broad - and low cost ownership, efficiency, reduce prices & convenience - Differentiation - narrow & ability to have an inelastic market, reduced bargaining power - Differentiation strategy requires appealing to preferences that can not be imitated, higher costs, smaller volume, higher prices and margins. - Low cost requires focus on efficiency, standardization, high volume, and low average cost, moving products quickly through the value chain My Notes: - Which of the two strategies is most effective depends upon the nature of the environment and the resources and capabilities of the firm - Low-cost necessitates a relentless focus on efficiently standardization, high volume, and low average costs - Low-cost is generally focused broadly but need not always be so--provided customers are considering options only within a limited range - Important things to remember about low-cost based CA is that it seeks to capitalize on customer elasticity - Differentiation is often associated with a narrower scope - For differentiation, to reduce elasticity, and so reduce customer bargaining power, it is necessary to appeal to customer preferences in a way that cannot be easily imitated - Differentiation will often require higher costs and a willingness to sacrifice some volume--however, this strategy will generally produce higher prices and higher margins

Introduction (Online Book)

- Business level strategy concerns individual business strategies in individual markets. However, there are many corporations that operate in multiple industries. Within each industry are specific business units of the corporation that have unique strategies equipped to compete with that particular industry's customers and rivals. Because of these unique strategies, it is necessary for these business units to operate with a certain degree of independence. Thus, a corporation may have a competitive advantage in some markets and with some units, but not in others.

Introduction (Her Notes and My Notes)

- Business-Level Strategy -- The pursuit of competitive advantage by a single business within a specific competitive environment -- Specific environment -- Single industries -- Single markets -- Competing against rivals in a particular market -- Asks "how will the firm compete against its rivals in a given industry or particular market? -- Competitive advantage emerges from this sort of single business competition -- Some businesses compete in more than one product market, with multiple and different business units, each of which operates within its own industry, with its own customers, competitors, and market dynamics Strategic Business Units - Each business unit: -- Operate somewhat independent of each other -- One unit could have a strong competitive advantage and another unit may not. -- Other business units are seen to help the company in general

Summary (My Notes)

- CA emerges an is best understood at the level of the individual transaction -- transactions are the key linking pin between strategy and performance -- strategy leads to action and actions lead to the transactions from which revenues and earnings flow -- transactions, then, are the foal point of strategy and the fulcrum of strategic success -- they provide a logical and powerful lends though which to view and understand CA - At the meeting of the industrial economic view and RBV is where the individual transactions are found, where customers determine what products and services provide the greatest consumer surplus and value -- Where there is superior value there is also CA and translations that render value to they buyers and revenues and to the sellers - For customers, value will always reflect some combination of two generic motivations (focused low-cost, focused differentiation) -- Differentiation approach is appropriate when the demand is inelastic -- Low-cost approach is appropriate when the demand is elastic -- these generic strategies are best understood at the transactional level --- so, a differentiation-based strategy is one that seeks to increase and capitalize upon inelasticity, either by restricting options or by increasing the use value of a particular product, service, or brand --- conversely, a low-cost based strategy is one that endeavors to reduce transaction costs for the buyer, so as to leverage and capitalize on the elasticity of the demand --- in both instances, though, success is determined by the customers' perceptions of value in the context of all the other alternatives and options --- and, with each successful transaction, the firm creates value for its customer, solidifying its CA and enhancing its own success - Strategy, which is often thought of as a high-level activity, involving long-term thinking and planning and broad organizational commitments an actions, can also be seen as an effort to win a series of many miniature competitive episodes - Strategic success is actually a function of many individual successes in multiple and distant competitive episodes, which are ultimately won or lost at the transaction level

Summary (My Notes)

- CA emerges as organizations fit themselves into their environments - Assessing FIT (the alignment of the organization's resources, its strengths and weaknesses, with the nature of the opportunities and threats within its environment) requires first understanding the nature of the environment, both as it exists presently and as it is likely to exist in the future - With that understanding, the next step is to evaluate the organization in terms of its capabilities and resources -- the object of this analysis is to determine how the organization's profile of S & W fit what is or what will be required for the particular competitive environment Strat MGMT offers 2 powerful concepts 1) RBV -- from this perspective, CA and profitability rest upon the development and use of resources that are valuable,; rare, inimitable, and non-substitutable 2) Value Chain -- CA is attributable to a sequence of value-generating activities that can be decomposed and assessed in their constituent parts - by combining the two models, and through competitive profile analysis, we can get a sense of which capabilities contribute the most to CA and what sorts of resources underlie those capabilities - we can get a sense of how the firm should be structured and how its resources should be cultivated and deployed to capture CA in the future - It is important to keep in mind that resources and the competencies that they enable are valuable only when applied in the appropriate context - In analyzing the environment we get a systematic and sophisticated understanding of the opportunities and threats, both presently and in the future - In analyzing the firm, RBV and Value Chain, we get a sense of the key S & W within the context in which the firm operates - Combing these two perspectives, with external and the internal, through competitive profile analysis provides a powerful lens through which to see and assess the firm, its strategy, its CA , and its prospects going forward

Corporate Strategy and Competitive Advantage (My Notes and Her Notes)

- CA is generally considered a business-level phenomenon, it is important to note the connection between synergy, CA, and corporate-level strategy - A successful corporate strategy increases the net value of its business units - As a practical manner, this means increasing the net earnings of the business units over time - Earnings relate directly to CA - So, successful corporate strategy really strengthens the net CA of the business units - In other words, corporate strategy employs all the resources of the organization in such a way that the net CA of the whole is maximized - To explain it in another way, the synergy that is produced by an effective strategy can be thought of as a unique and valuable resource that is very difficult to imitate and very difficult to substitute - As such, a successful corporate strategy can yield strong and sustainable CA - As if to underscore this point, Porter describes the true test of corporate strategy as being whether it produces an organization that is better off than it would have other wise (synergy) - But how does a corporate strategy make a diverse set of business units better off than they would have otherwise been? How does a firm use corporate strategy to strengthen the CA of its business units? - Porter describes four general approaches: 1) Portfolio Management 2) Restructuring 3) Transferring Skills 4) Sharing Activities Her Notes - Corporate strategy employs all the resource of the org. so that the net competitive advantage of the whole is maximized. - True test of corporate strategy - (Porter ,1987) Is the organization better off as a whole than the business units are independently? - Porter's Four General Approaches 1) Portfolio Management 2) Restructuring 3) Transferring Skills 4) Sharing Activities

Nature of Competitive Advantage -- Competitive Advantage as an Interaction (Her Notes and Mine)

- CA occurs because a particular firm has some specific value-generating capability that other competing firms do not possess or cannot immediately replicate or substitute - this ^ statement carries implications that go beyond the relationships to a firm's resources - For example, what makes a capability or a resource valuable? -- the most immediate and tangible demonstrations of value is the price a buyer is willing and able to pay -- thus, to say that a firm has some value-generating capability implies that it can produce good or services that someone is willing to buy - assessments of a firm's value-generating capacity must take into simultaneous account the resources and capabilities of that firm and the valuation of those resources and capabilities by the buyers - buyers don't exist in a vacuum; buyers have alternatives, either to purchase elsewhere or not to purchase at all - buyers' valuations of any firm's products and services will reflect, at least in some measure, the attractiveness of the alternatives available -- where there are a few attractive alternatives, customers may value a given firm's products more * -- where there are numerous attractive alternatives, customers will value a firm's products less * - This focus (^) on the CONTEXT in which buyers make determinations of value is the focus of the industrial economic view of CA (which says CA arises from conditions where the options and the bargaining power of buyers are limited by the desirability of the product or service and by the absence of suitable alternatives) * - CA reflects the intersection of two sets of interdependent forces or conditions * - On one side, are the CONTEXTUAL FORCES and contains of the competitive landscape -- these include such things as bargaining power of the seller and buyers, the availability and attractiveness of the various alternatives, the willingness of competitors to offer inducements, and the ability of customers to search for alternatives - On the other side, are the RESOURCES AND CAPABILITIES of the firm -- these must be sufficient to generate value in the eyes of the customers, and to generate that value in a unique and special fashion, if the products and services are to be desired over the alternatives - Understanding CA requires understanding that all transactions occur at the intersection of these two sets of forces, and that it is through these transactions that CA emerges

Competitive Profile Analysis (Her Notes)

- Combines information from the environmental analysis and the information from the organizational analysis of the firm. - Exercise in logic - Identify, develop, and leverage the resources and competencies for superior performance, given the conditions of a specific industry, and environment.

Nature of Competitive Advantage -- Focusing on Transactions (Her Notes and Mine)

- Competitive Advantage only occurs through the transactions with the customers. - Firms can have valuable resources and market space, but to have competitive advantage, they must have the transaction. - The reason the purchase is made -- why the customer chooses the products. -- Answer includes a superior value to the customer -- Some advantage to buying from the organization -- Some superior advantage in obtaining a service from a particular org. --- There is a reason why one organization is successful over others in each transaction. - At one point or another, all the effects of strategic management are manifested in the stream of transactions between a firm, its customers, and its suppliers - Transactions represent key linking pins between goals and objectives, the competitive environment, a firms resources and capabilities, and a firm's performance - Understanding that CA emerges in this key linking event can provide a number of benefits to the practice of strat. mgmt. - Foremost among those is focusing the attention of management in the proper place--focusing on profits, rather than on the things that lead to profits can be a mistake; same with sales growth - Strategic managers would do well to focus on CA, its development and its maintenance--if they are able to do that and do it well, then the chances are good that financial performance will follow - Viewing and understanding CA at the transaction level can also serve to keep management hungry and vibrant - Even in those instances where one firm seems to be better positioned, or simply better managed, than another, its advantage is still a temporal achievement, earned one transaction and one customer at a time--view CA as an ongoing and continuous pursuit 1) Determined by the Customer 2) A Reflection of Context 3) Episodic

Competitive Profile Analysis (My Notes)

- Competitive Profile Analysis combines the information and insights gained in the environmental analysis with the information and insight in the analysis of the firm - it is really just an exercise in logic The idea is simple: - to identify, develop, and leverage those resources and competencies essential for success, given the conditions of a specific industry and environment - the result should be a firm those resources and capabilities are configured and deployed in a way that is appropriate to the emerging competitive conditions of its environment - "a good hockey player plays to where the puck is; a great hockey player plays to where the puck is going to be" - Christensen, Raynor, and Verlinden describe how firms can leverage this principle and "skate to where the money will be" by positioning themselves to take advantage of evolving trends and conditions - Competitive Profile Analysis is a tool for identifying this position and configuring the resources and capabilities of the firm to take advantage of it - It starts with a thorough environmental analysis - Then, develops an ideal profile of capabilities and resources needed to succeed in that particular industry - The strategist will use the value chain to map out that profile by "assigning" values to each of the carious activities - Based on that information, we could assess the contribution and importance of each of the primary and support activities within the value chain, in an effort to discern which are likely to drive value creation and yield the most competitive advantage, both presently and in the future In Regards to Primary and Secondary Functions (the following two note cards--this description came in between the first and final steps--looking at the primary and secondary functions): - it is important to remember that all of these assessments and values are based upon the environmental analysis - thorough and insightful analysis of the industry and its competitive structure, including pace of technological change and changing demographics, incorporating the diffusion of innovation and the imitation of successful practices, is what drives the assessment of the key competences and resources that a firm must posses - The final step in the analysis is to evaluate the firm in relation to an ideal profile of key competencies -- involves asking: how well does your firm stack up? on each of the value chain activities, what is the real and current position of the firm? - A comparison can then be made of the ideal and current scores - A gap between an ideal score of "8" and a current score of "5" would suggest the ned to invest more heavily in the development of that activity - At the same time, an ideal score of "3" against a current score of "8" might suggest the prospect for some cost savings through the elimination of some resources, an opportunity to reallocate some resources form a less important function to a more important one, or an opportunity for new business through the provision of this activity

Low Cost (Her Notes and My Notes)

- Competitive advantage that reflects ELASTICITY in the buyer because they are indifferent. - No preference or difference in suppliers of desired products or services - Buyers have good alternatives for buying-- Therefore, high bargaining power. - Customers can easily walk away or buy a substitute product. - Because customers are indifferent, products are seen as a commodity. (when customers see very few differences in the use value derived from any particular provider, they maximize their consumer surplus by purchasing at the lowest overall cost) - Use value among alternative is low, so customer surplus is high because lowest cost. -- Lowest overall cost includes more than simply the lowest purchase price; price and cost of acquisition (time and energy), reliability, repair and service. --- total cost of acquisition involves the price, search time, and a number of other factors -- Total Cost of ownership is the figure that is most relevant to low-cost CA - Challenge is because of customer indifference & elasticity--great bargaining power -- The seller needs to be the best option given what the customer values - low cost. -- This strategy is deliberate to add value that includes more than price -- Requires low margins, so low costs of acquisition/ low cost to the buyer. -- No loyalty by the customer, so the seller can not rest in historical purchases. My Notes: - Low-cost CA is achieved by offering the lowest cost of ownership to customers who see identical or nearly identical use values across the range of comparable products or services - Easier said than done - The low-cost strategy seeks CA by being the lowest total cost option to elastic customers - Success with a low-cost strategy involves becoming the best option for customers who are elastic and largely indifferent across the range of sellers - Keeping these elastic customers satisfied requires persistence and ongoing effort

Competitive Profile Analysis (online book)

- Competitive profile analysis uses the value chain and combines environmental analysis with the internal, resource based analysis to provide a clear assessment of the firm's strengths, weaknesses and strategic priorities, in the context of its environment.

Differentiation (Her Notes and My Notes)

- Differentiation based strategy involves elasticity -- Defined as the sensitivity of the demand to the cost of acquisition. -- Inelastic customers have low bargaining power, few substitutes, not interested in alternative products. (for these customers there is one preferred option and one preferred supplier) --- that ^ supplier than can be though of as having monopoly power over those particular buyers -- Inelasticity of buyers - because of the desirability and satisfaction of preferences. - Seeks to create competitive advantage through the cultivation of high use value, inelasticity and monopoly power for the specific provider - Elements in creating a preference: -- Finding and focusing on a particular market segment -- Understanding the preferences and desires of that group of buyers sufficiently well to create for them the sort of products and services that they will value highly -- Creating a sense of exclusivity (where those customers will see the particular firm as the one best option for this type of purchase, to the exclusion of other alternatives and potential substitutes, even when those other alternatives and substitutes are less expensive) -- Building the reputation -- Excludes substitutes -- Creation and delivery of products and services that are in fact of sufficient quality to make good on the appeal of the image and the advertising (marketing and advertising) -- Pricing high enough for a good return to the seller and still in a price the customer can afford My Notes: - inelastic customers are willing to pay premiums prices for a certain product/service or are willing to expend more time and energy in search for them - differentiation is a strategy that necessitates higher costs but that yields high margins, by creating higher use value for the customer

Key Terms

- Diffusion - Direct costs - Distinctive competencies - Exchange value - Indirect costs - Intangible resources - Primary activities - Support activities - Tangible resources - Use value - Value chain

Focus (Her Notes and My Notes)

- Directed toward preferences customers value -- Customers seek the --- BEST VALUE (simply means the greatest level of consumer surplus) --- Greatest level of consumer surplus. --- The difference between use value (high or low) and total cost. Focus can be on use value or cost of transactions. My Notes: - Where the use value of a product or service is sufficiently high, even a high price can yield high consumer surplus - Even if the use value is low, a sufficiently low price can still yield high consumer surplus - Thus, value to the customer should not be perceived as meaning any particular level of quality or any particular level of price - Instead, value to the customer is the difference between overall use value and the total cost of the transaction - Total value to the customer is synonymous with consumer surplus, and consumer surplus is a reflection of both the level of use value and the cost of the transaction - We can categorize CA by the way in which a firm seeks to increase consumer surplus: -- either by targeting use value --- where the use value for a firm's products and services is sufficiently high, firms can make profitable transactions even when their costs are high ---- firms can work to reduce their costs, and by doing so, can gain the ability to make profitable transactions even when the use value of their products or services is not especially high -- or by targeting the cost of the transaction - Both sets of conditions are specific to a particular group of customers or to some subset of the overall market - Creating high use value can mean targeting and segmenting a particular set of preferences, specific to a particular set of customers - Firms must provide value to customers by becoming the best choice, within the context of the options available - Every case requires an element of focus - Focus is less a generic strategy and less a source of CA than a characteristic of every strategy that leads to CA - Every successful strategy has some measure of focus - Focus will be either on the unique preferences of a specific group of customers or on a specific space within a market where a firm believe its products and services appear as the best option among many alternatives - Focus transcends the other generic strategies, as every strategy and every CA, whether cost based or differentiation based, will have some degree of focus - The challenge is to match the degree of focus appropriately to the segment of the market and to the type of CA that is being pursued

Nature of Competitive Advantage -- Episodic Nature of Competitive Advantage (Her Notes and Mine)

- Dynamic Capabilities perspective -- understanding an learning to manage episodic nature of CA is at the heart of what is called dynamic capabilities perspective -- CA emerges through the interaction of two dynamic conditions or forces --- Conditions or Forces in the Environment --- and Those within the Firm -- as a consequence, CA itself is highly dynamic and subject tot change -- the pursuit of CA, therefore, is an ever changing, ever adapting, and continuously ongoing challenge - Firms are dynamic in the sense that they are: -- Revising offerings -- Developing and acquiring new resources and capabilities -- Imitating competitors -- Learning from historical contexts (successes and failures of previous episodes) - "No competitive advantage is Safe, Moreover, no disadvantage is insurmountable." - Competitive advantage exists only as long as the conditions stay the same. - Any change in the customer, the firm or the environment change the opportunity for competitive advantage. My Notes: - Because CA occurs at the intersection of dynamic forces and conditions within the environment and the firm, each occurrence is episodically specific - In each competitive episode the battle for CA is renewed - Every competitive episode is essentially unique because, with each iteration, some of the variables on either side of the transaction change, even if only modestly - No CA is safe - Each competitive episode occurs as specific customers, with specific needs, go into them marketplace and search of the best value--as they do, they encounter unique and finite sets of options, products, and services with specific attributes and features, at specific prices and terms, offering a particular level of value to particular customers - Customers choose the option that, to them, appears to offer the greatest value, greatest surplus and greatest advantage - CA has occurred to the firm that was chosen, but the advantage exists only for so long as that set of conditions continues to exist - Any change on part of the customer, part of the firm, or on part of the exogenous context, can affect that advantage and so can have real and tangible effects on the performance of competing firms

Home Depot and Lowe's

- Home Depot Homepage (link) - Lowe's Homepage (link) - Lowe's Challenging Home Depot for Improvement Sector Preference (link) -- Mike Duff's Business Net article chronicles Lowe's recent competitive offensive against Home Depot Online Book: Home Depot's entry into the home improvement market proved to be far too much competition for smaller stores like Ace Hardware or other locally owned building supply firms. Home Depot's model of large warehouse stores, with a large selection and low costs dominated the competitive environment. In response to this, Lowe's adapted by launching its own warehouse stores. However, Lowe's also refined the model, making slight changes to appeal to a wider demographic. In so doing, Lowe's offered a real competition challenge to Home Depot. To date these stores remain the other's largest competition, while both do very well financially. My Notes: - as Home Depot developed it's many do-it-yourself learning programs and cultivated its brand identity, smaller chains such as Ace Hardware, True Value, and Hechinger's began to disappear - Started in Atlanta, expanded to the rest of the US - Lowe's (North Carolina) began its strategy in effort to respond to Home Depot -- converting the majority of its retail centers into a similar warehouse format -- they reminded the HD model by moving away from the rugged contractor look, choosing instead to target the female segment of the home improvement market -- ad a result, it developed nicer looking stores, with higher end products, while still managing to maintain similarly low prices and high levels of inventory and selection -- they chose this approach because market research showed that the majority of home improvement decision were made by women -- as a result, their strategy had a broad appeal to both women and men who wanted the large selection and low price but who also found HD unappealing and unfriendly - over time, though, both firms have performed well - HD continues to be market leader (US and other countries too) - both had the same average return on sales per every dollar of sales - start of 1010 = HD had market capitalization of nearly $57 billion compared with $37 billion for Lowe's - while both firms suffered setbacks in volume, profits, and value in 2008-2009 as a result of the general economic decline, both continue to be strong competitors, with considerable resources to invest in future strategies in and growth

PRIMARY FUNCTIONS (My Notes from the Book)

- Inbound Logistic functions are a key success factor in this industry and a key source of competitive advantage (without the right content, competitive advantage will be hard to achieve) - Operations includes things such as online distribution, inducing, editorial value -- these functions are important to the contribution to the final product -- however, they cannot make up for deficiencies in other areas, nor are they likely to be unique to any one firm, as they are often based on broadly available technologies and on know-how that can be acquired in the market -- although important, their importance to competitive advantage is somewhat lower - Outbound Logistics are similar in that they are an essential function, but not a function that contributes tremendously and uniquely to competitive advantage -- rarely add much value -- these sorts of abilities and functions are also generally characteristic of many firms -- while important, not a key to competitive advantage - Sales and Marketing are tremendously important -- this function is valuable, it is also rare and unique -- an established relationship and a good reputation are key elements of an effective sales and marketing effort -- building a strong reputation and developing those trusted relationships takes great time and effort but, once established, they represent competencies that are difficult to imitate -- thus, a competency in sales and marketing can be a key source of competitive advantage - Service after the sale is modestly important -- feedback -- ability to gather input and to respond effectively is part of the service function and is potentially important to the ongoing competitive advantage -- probably not as important as the inbound logistics or the original sales and marketing functions ^^ (this is broad information that came from the text that was explaining an example throughout these different functions) -- probably more to it but that is the general idea that came from the example ****

Concluding Thoughts and Caveats -- Monopoly, Limits to Competition, and Competitive Advantage (Her notes and My notes)

- Monopoly--different strategies means different monopoly power in either case sellers still need to attract customers and limit competition. -- Differentiated - leaving the customers less elastic and limiting options. -- Low cost - limiting the range of customers available - All purchases reflect a desire that customers want to increase their surplus - either use value or total cost - All strategies of differentiation or low cost have some element of the other in the strategy My Notes: - Strategic management can be seen as a process of cultivating small, pseudo-monopolies - A monopoly = a situation where there is only one supplier; where there is only one supplier, there is no competition and so few limits on profitability - Even monopoly profits are limited by the resource constraints of the buyers - Still, where there is no competition, profits are certainly easier to achieve and sustain - Strategic Management can be viewed as a process where firms seek to attract customers and to limit competition, in effect creating for themselves monopoly-like conditions - The different types of CA discussed earlier can be seen as different paths to monopoly power - With monopoly power, firms can charge prices over their costs and because of the inelasticity of their buyers - Firms do this by positioning their products and services so that they represent the highest available level of consumer surplus to their customers - There are also instances where monopoly power is less a function of limitation than it is a function of choice

Types of Competitive Advantage (online book)

- Porter's Generic Strategies (link) -- Quick MBA's detailed explanation of Porter's three generic strategies -- Porter identifies three generic strategies that can lead to competitive advantage: focus, low cost, and differentiation. Some firms achieve competitive advantage by focusing on a specific customer group or a specific set of products and services. Some firms have a product or service which appeals to the specific tastes and preferences of particular customers. Those customers are said to be inelastic. Inelastic customers only want one specific product, and the firm with that product has monopoly power as a result. This is the idea behind differentiation. The flip side of this is low cost, which is a strategy used to appeal to elastic customers. These customers have little preference for any particular product; they simply want the lowest overall transaction cost. The time and energy required to purchase a product are just as important to the customer as the actual price, and all these things together make the total cost of ownership. Creating a low total cost of ownership, as necessary to appeal to elastic customers, is the real heart of a low cost strategy. Differentiation, Low Cost, and Performance - Target Homepage (link) - Nordstrom Homepage (link) - A Critique of Porter's Cost Leadership and Differentiation Strategies (link) Y. Datta of Northern Kentucky's College of Business examines the nuances of these two strategies - Differentiation and low cost are both effective strategies for gaining competitive advantage, but they each operate very differently. Target is a firm that has succeeded using the low cost strategy, while Nordstrom is a firm that has succeeded using the differentiation strategy. Both have achieved great performance, but for different reasons. Target supplies a large, elastic customer base with a large range of products in a low overhead environment at the expense of high profit margins. Nordstrom achieves a high profit margin in their sales by having high quality products sought after by an inelastic customer base, but this requires a more intensive effort, with more resources devoted to each sale, than that of Target.

Review of Concepts (Her Notes)

- RBV analysis -- looks at how firms create value in the eyes of the customer and how value emerges from the environmental options. -- Identifying sources that create value (value chain) -- Use VRIO framework to find the firms resources, capabilities, and core competencies. -- Linking the internal strengths and weaknesses to the external opportunities or threats produces the strategic options. -- The ideal strategic profile Competitive Profile Analysis -- Combines value chain analysis, with the VRIO criteria and the information from the environmental analysis. -- Based upon the environmental analysis and the mission and goals of the firm, an ideal profile is developed. -- That ideal profile provides the benchmark against which the current value chain is evaluated. -- The gap between the ideal and the current guides the development of new strategy.

How to Complete A Competitive Profile Analysis (Her Notes)

- Starts with the environmental analysis (OT) - evaluating the competitive environment and the maturity of the product/service -- Then Porter's five forces. -- Then the macro-environmental trends --- Environmental Analysis - Sets the context of the strategy - Second, set the ideal profile of the capabilities and resources (SW) needed to succeed in the environment. - Third, map out the profile using the value chain and assigning value to each of the activities to determine which ones will drive competitive advantage. -- Give a score based on the Resource-Based framework. - Final step, assessing the gaps, evaluating the firm on based on an ideal profile of key competencies -- Two key questions: --- How well does the org. rate on each of the value chain activities? --- What is the ideal and current condition of the org? --- Assess against industry leaders and benchmarks to find the gap, where is the org and where Is the benchmark? -- Too low a score, a weakness to work on, -- Too high a score, possible outsourcing without loss of competitive advantage ** View slide 11 of Lecture 2 Chapter 5 PDF for a visual of value-added functions / value chain

Concluding Thoughts and Caveats (Exceptions for Consideration)

- The fallacy of the better mousetrap - The ongoing nature of sustainability - Casual ambiguity and social complexity

Nature of Competitive Advantage (Her Notes and Mine)

- The objective of strategy and all efforts are aimed in this direction. - Arises when bargaining power of buyers and suppliers is reduced; -- CA arises amid environmental conditions were the bargaining power of customers and suppliers is limited and where options for product substitution are rare - Through resources that are valuable, rare, inimitable, and non-substitutable - Lasts as long as the resources are available--as long as those resources can be maintained and protected - It is about customer's satisfaction perception of value among all the various and available alternatives; firms with CA are seen as the most attractive option by their customers - CA leads to performance, in terms of sales, profits, and in the end, the value of the org. - important to understand that CA emerges in the transactions between buyers and sellers - firms can hold rare and potentially valuable resources'; they can also occupy valuable and protected market space -- however, none of that matters in any tangible way until customers act and transactions take place -- it is important to remember that these things are not CA itself -- instead, CA is the reasons that a purchase is actually made - At the most basic level, CA is the answer to these question: -- Why does a customer choose products or services of firm A over those of B? - CA is really evidenced only when there are profitable transactions, because it is in those transactions that customers reveal their judgments about the relative value of the various products and services competing for their attention and preference - CA is the reason why a firm succeeds over its rivals in a particular competitive episode

Concluding Thoughts and Caveats (Online Book)

- The process of strategic management is more than just a formula. Success in a competitive environment requires creativity and innovation based on the uniqueness of the environment. - A monopoly is the absence of competition. One objective of every competitive strategy is the elimination of competition, to create a monopoly-like environment. This can be achieved through either a low cost or a differentiation strategy. - It is important for firms not to be "stuck in the middle" of more highly differentiated and lower cost competitors. However, all strategies involve some combination of both elements. Remember, each strategy is unique to its environment. So being stuck in the middle is a relative condition. - The pursuit of sustained competitive advantage is ongoing. The most valuable assets to a firm are those that are flexible and able to change.

Portfolio Management (My Notes and Her Notes)

- This approach is often associated with conglomerate the organizational model -- conglomerate firms are firms as companies that diversified into multiple, unrelated businesses through the acquisition of large number of business units -- this approach was to acquire solid and well-run companies, in attractive indicates, and then to allow those businesses to continue operating autonomously -- because the units were independent, there was little need for corporate-level management beyond shared services like legal, finance, and executive-level planning -- strategic and operational management was handled at the business level, by individual managers, who were evaluated based upon unit success -- in this respect, each business unit was its own profit center--responsible for its own revenues, costs, and profits -- and the corporate whole prospered as the business units prospered - The key to this strategy was the identification and acquisition of strong and well-managed business units and the provision of basic services that would allow them to operate more efficiently - What synergy there was resulted from the sharing of corporate overhead, the access to lower-cost capital, and the superior knowledge of the corporate management - BCG matrix grew out of this concept of corporate strategy - Corporation vowed group of business units as a portfolio of varied investments - They then allowed capital across the investments based upon their various growth and performance expectations - This created an internal capital market where management had access to better information than other private investors about the companies in its investment portfolio - Had better communication with participation from their investors - Result = more efficient capital market, lower transaction costs and better information - Due to greater information symmetry and because of the opportunity for the investors to be more involved in their investments, conglomerates were though to be better at allocating capital than the public market - Seen as less risky than any single business organization because the corporation represented a market unto itself, with multiple and diverse sources of cash flow - In addition to lower cost of capital, corporate management provided oversight and counsel to the business unit managers, along with administrative support in the areas of human resource management, accounting, and infrastructure - Conglomerate model sought to build synergy by offering the business units the freedom to focus only on their key, value-adding operations - Individual businesses more profitable by being able to off-load a measure of administrative overhead onto the corporation, and gaining the freedom to focus just on their own products, services, customers, and competitor - Portfolio was and still is a bassi for a successful corporate strategy - But, for many firms the portfolio concept has proven problematic more often than not - B/c various benefits are quite difficult to achieve in practice -- example: human resources and accounting work very differently in different types of industries and firms - Corps can end up adding costs at the corporate level without reducing them adequately at the business level - Being involved in too many dissimilar businesses can also reduce the value of the counsel and advice that corp management provides - Corp managers often find that they simply lack sufficient expertise to add value in the broad variety of businesses in which they are diversified--even in the area of financial synergy, the expected benefits often fail to materialize - Having multiple sources of cash flow offers little to stockholders - Internal capital market is subject to greater bias -- Corp managers can be slow to recognize their own mistakes and biased in their assessment of their portfolios - Efficient flow of capital across the business units can be hindered by a host of different human biases, conflicting motivations, and political interests - This approach has been shown to be workable only in rare instances - The challenge of the portfolio manager is actually to achieve the expected financial and administrative synergies that were foresee at the time of the decision to diversify -- Without those synergies, the corporation will inevitably impose new costs and impediments without necessarily creating new revenues or savings--the result of which will be a corporation that is worth less than the sum of its parts Her Notes: Portfolio Management - Associated with Conglomerate Organizational model (Rumelt, 1974). "Companies that are diversified into multiple, unrelated businesses, through acquisition of a large number of business units." -- Acquire well run businesses in attractive industries -- Allow business to operate independently -- Minimal corporate management needed (e.g., legal, finance, HR) -- Operation management done at the business unit level -- Each unit was its own profit center -- Corporation was profitable if the business units were profitable. Several Cons to this approach - Reduced profitability due to: -- Very dissimilar BU require different supports resources -- Lack of diverse corp. expertise to help diverse BU -- Lower risk, lower return to investors. -- Bias and conflicting motivations and political interests. Pros: - Greater Profitability due to: -- Freedom to focus on value adding operations -- Shared administrative overhead -- Focus only on their own products, service & customers

Restructuring (My Notes and Her Notes)

- This model is the antithesis of the traditional approach to corp strategy - The restructuring approach looks ahead to the firm getting out of its business--whereas corp strategy determines what businesses a firm should be in - Single biggest key to success is the spread and cost of the acquisition and the price of the sale, along with the earnings that can be achieved to the interim - The corporation restructures the business in an effort to make it worth more than it was before the acquisition - Synergy comes from combining undervalued assets of the business unit with the managerial expertise and resources of the acquiring corporation - 3 key requirements to making this strategy work: 1) Ability to spot undervalued opportunities 2) The expertise to reorganize the business unit's assets and activities as necessary to unlock that unrecognized potential 3) The discipline to see each investment as a means to an end and so to sell it and extract its newly increased value - However, recognizing those opportunities in time to capitalize on them before their value becomes public knowledge, and so apparent to everyone, is difficult - This sort of opportunity recognition is an inexact science--but is a corp strategy that has proven viable for some firms over the years - Another key to success seems to be timing - There are certain points in time where the opportunity for restructuring is greater than others - This approach can be successful for those with the right skills and resources Her Notes: Restructuring - What businesses the corporation should be in. The process of getting out of the business. Keys to this method of corporate strategy - Not formulaic - Seeing undervalued opportunities - Recognized the untapped opportunities with the goal of selling - Developed sense of opportunities, and environmental changes sooner than competitors. - Recognizing the evolutionary cycles of firms to seize the right moment for restructuring

Nature of Competitive Advantage -- Types of Competitive Advantage (Her Notes)

- Transactions - Competitive conditions versus the outcome of transactions - Continuous cycle that changes with: -- Shifts in competition -- Changing tastes of customers -- Changing environment - Transactions that "win" over and over again constitute performance. - Customers make transaction decision on their own values and choices, and not market analysis.

The Nature of Competitive Advantage (online book)

- Using Customer Insight to Build Competitive Advantage(link) -- Lane Michel's article stresses the importance of customers in the process of building competitive advantage Your Competitive Advantage Tony Alessandra explains that winning over customers creates competitive advantage-- VIDEO - Competitive advantage occurs when a firm has a product or service with VALUE GENERATING CAPABILITY that its competition does not have. Thus, competitive advantage then yields profitable transactions. These transactions reveal the customer's perception of the products and services a firm provides in relation to its competition. Affecting these transactions are the forces discussed in chapters 4 and 5: the competitive environment in which the customer's choices take place, and the resources and capabilities of the firm, which enable the characteristics of the products and services. Amidst these interacting forces, customers select and purchase the products and services which provide them with the most value. Individual transactions then are the building blocks of competitive advantage and organizational performance. Indeed, viewing competitive advantage at the transactional level should serve to keep management hungry and motivated. - In and of themselves, resources are not intrinsically valuable. Rather, they become valuable when used for some purpose. Customers ultimately decide a resource's value by choosing whether or not to use it or to use the products and services it enables. The pursuit of competitive advantage then should focus first on customers and on resources as a reflection of those customer's choices. The pursuit of customers is never ending, as taste and trends are often changing, and many times not as a result of the customer demands. Something like a technological advancement can change the flow of supply and demand without warning. The nature of change must always be considered in competitive advantage. No competitive advantage is safe, and the struggle for it must be constantly renewed.

Value Chain (My Notes from Book)

- a tool understanding and decomposing the value-generating activities and resources of an organization is the value chain, devised by Porter (1985) as a means of illustrating the various categories of value-adding activities that organizations perform - each category represents a potential source of competitive advantage - based on simple but powerful and broadly applicable idea--specifically, that the value the customers see, and the value that leads to profits, results from a series of distinct but interconnected activities - Primary activities are those that contribute directly to the creation, manufacture, marketing, sales, and service of products and services -- primary activities of a firm's value chain are related to the accounting term of direct costs -- direct costs are defined as that portion of total cost that is directly expended in providing a product or service for sale --- they can be traced directly to units of the product or service and include such things as raw materials, labor, and inventory -- one way to think about primary activities in a value chain is as those activities through which the firm incurs direct costs - it takes more than just the primary activities to run a firm and to produce and sell a product, thus --> - Supporting activities -- maintain the firm and provide the necessary infrastructure -- these are related to the indirect costs --- which are that portion of total costs indirectly expended in providing a product or service for sale --- often referred to as overhead, indirect costs cannot be traced to a given unit in any simple or transparent way and involve things like utilities, physical plant and maintenance expenses, human resources administration, and IT infrastructure -- these sorts of costs and the activities that they support are essential to a firm's operation and may often be at the very heart of its competitive advantage - The value chain can serve two important functions in analyzing the capabilities and competitive advantage of an organization - First, it can serve as a valuable reminder of the various categories of value-adding functions in which firms engage -- where customers see superior use value and where firms are able to capture a profitable exchange value, the sources of that value can be traced to some combination of activities depicted in the value chain - Second, the value chain can facilitate an important analytical process, designed to identify the key success factors for competitive advantage within a particular industry and for finding areas of strength and weakness within the firm -- key success factors are simply those parts of the value chain that are essential for profitable competition within a given industry -- by benchmarking its strengths and weaknesses against these key factors of success, a firm can assess its resources and capabilities, its strengths and weaknesses, in a way that is specifically suited to its competitive situation

Introduction to Organizational Analysis

- competitive advantage emerges when a firm creates value for its customers, some of which it captures and extracts in the form of profits - for competitive advantage to be realized, there must be a seller, a buyer, and an exchange that both find valuable 3 related concepts to better understand - Use Value -- subjective valuation of a product or service by a particular customer--what the product or service is actually "worth" to a particular buyer - Exchange Value -- the actual price at which an exchange takes place - Consumer Surplus (next note card) -- the difference between use value and exchange value is consumer surplus - it is important to remember that consumers spend their money where they believe they can derive the greatest satisfaction - a portion of the competitive advantage that a firm has is due to the characteristics of demand and to the options that the customer has available--thus a portion of the advantage is attributable to the nature of the environment -- but there is also a portion that is attributable to the firm itself and the value offered by its products and services - understanding something about the firm's capabilities and resources is where issues can arise hence the RBV view of the firm From Online Book: Use value, exchange value, and consumer surplus are concepts central to competitive advantage. Use value is the value of a product or service in the eyes of the consumer, exchange value is the actual price at which a transaction occurs, and consumer surplus is the difference between the two. Thus, consumer surplus is the value left to the customer after the exchange value has been paid. Providing a high consumer surplus is the key to gaining competitive advantage. Internal, organizational analysis focuses on how a firm is able to affect changes in these values, so as to increase value to the customer as well as competitive advantage for itself.

Inelasticity

A condition whereby a certain percentage change in the cost of a good results in a less than equal percentage change in the demand for that same good.

Elasticity

A condition whereby a certain percentage change in the cost of a good results in a more than equal percentage change in the demand for that same good.

Harley-Davidson

- started in a small wooden shed and is now celebrating its 100th anniversary in 2003 - logo was registered as a trademark - made company history when it sold its first exports in Japan, marking its first international sales - merged with American Machine and Foundry (AMF) in 1969-- a sporting good and leisure product company that did not fit especially well the Harley-Davidson product and brand - acquired a reputation for low quality and had fallen out of favor with consumers by this time - under new management though, quality became the theme and a complete turnaround was initiated - over the next few years, many technological and production innovations helped to restore quality and their image, which also realized that when people bought a Harley, they were buying more than just a bike--they were buying an image and a lifestyle -- this led to greater effort in brand extension and a widening of the product line - in 1986, for the first time since the merger with AMF, the company returned to the public stock market, expanded its portfolio with acquisition of Holiday Rambler Corporation, purchase of a minority interest in Buell Motorcycle Company - reported an average profit of $655 million on sales that averaged $4.475 billion - while the recession hurt motorcycle sales worldwide, impacting Harley-Davidson along with the rest of the industry, no one can argue that the brand is now a symbol of resurgence and strength and that the company is well positioned for a successful ride into the future From Online Book: Harley-Davidson is a great American success story. It was able to grow from a small shed with a few motorcycle parts into a multibillion dollar organization. Harley has a strong public image built through consistently good products and customer service. People are buying that image when they make a Harley-Davidson purchase

Resource Based View

- this view of strategy views competitive advantage as arising from the differing capabilities of that firms have as a result of their differing resources - as a result of those differing resources and capabilities, some firms are simply known for and identified by specific capabilities - because of their resource endowments and capabilities, some firms are simply able to offer things that few competitors can match - these capabilities and the resources which under them, provide firms with distinctive competencies - the ability of those competencies to generate value for customers, while remaining distinct to the firms that possess them, is a key to competitive advantage and profit - together, all 4 components, give rise to competencies that are valuable to customs and distinct to particular organizations -- these distinctive competencies form the basis of an organizations competitive advantage

SUPPORTING FUNCTIONS (My Notes)

1) Firm Infrastructure 2) Human Resource Management 3) Technology Development 4) Physical Plant and Maintenance - some of the support functions will represent essential activities that must be emphasized (like in the primary functions) -- others are perhaps less central drivers of competitive advantage and so can be de-emphasized, to enable reallocation elsewhere ^^ (this is broad information that came from the text that was explaining an example throughout these different functions) -- probably more to it but that is the general idea that came from the example ****

Concluding Thoughts and Caveats (online book)

A firm can have a great product or service, but that doesn't necessarily mean great profits. All the primary and supporting activities must work together to support the competitive advantage. No product or service remains valuable forever. So, a firm cannot maintain competitive advantage forever based on just one product. Sustainability must be a constant goal, and firms must be willing to change and adapt in pursuit of it. Competitive advantage is rarely the result of just one asset or resource. Rather, competitive advantage emerges from a combination of interacting resources; this is the idea of casual ambiguity. Social complexity is a related concept. Together, they suggest that competitive advantage is illusive and difficult to achieve. Or, as Barney states, "firms cannot purchase sustained competitive advantage on open markets." Casual Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage (link online chapter 5) Richard Reed and Robert J. Defillipi's article discusses casual ambiguity and its relation to sustained competitive advantage

Demand curve

A graphical representation of a mathematical function, describing the relationship between the price of commodity and the quantity demanded at that price.

Tautology

A self-evident true statement with multiple parts that is true regardless of the truth of the parts. For example, the statement "either all sheep are white or not all of them are" is a self-evident truth.

Generic strategies

A term coined by Michael Porter (1980) to describe three basic approaches to achieving competitive advantage: "Cost leadership," "Differentiation," and "Focus."

Total cost of ownership

A term originally developed by the Gartner group and reflects all the various direct and indirect costs related to purchasing an asset. TCOO includes not only its purchase price but all other aspects of its further use, such as installation, training, and maintenance.

Casual Ambiguity and Social Complexity

Ambiguity and Social Complexity - "Firms cannot purchase sustained competitive advantage on open markets" - Barney - The relationship between competitive advantage and the resources that enable it is complex and difficult to discern, embedded in human interactions, historical endowments, and networks of tacit knowledge - Not one area that will provide competitive advantage, rather complex interaction of resources and conditions. - The process of gathering resources and creating from them competitive advantage is an imperfect one and cannot be reduced to a simple and generalizable formula. - Connections between a firm's resources and its competitive advantage are not well understood. - The process of resource acquisition and development becomes much more imprecise, uncertain, and expensive. - Social complexity simply means beyond the ability of most to understand or influence -- CA is generally embedded in bundles of resources that connect to one another and to the people and operations of a firm in complex ways -- As a result, Competitive advantage is rarely attributable to any single, solitary resource or ability. - Competitive advantage is not a commodity that can be bought and sold. - Causes and effects will often be ambiguous and the benefits and capabilities of resources will often be embedded in networks of social interactions ** VIEW SLIDE 17 Of Lecture 3 Chapter 5 PDF - the link between any particular resource and CA is said to be causally ambiguous and socially complex - the process of gathering resources and creating from them CA is an imperfect one, which cannot be reduced to a simple and common formula - Casual ambiguity exists when the connections between a firm's resources and its CA are not well understood - under such conditions, it is difficult to know which resources produce which outcomes - as a result, the process of resource acquisition and development becomes much more imprecise, uncertain, and expensive - casual ambiguity makes it difficult for one firm to simply imitate the success of another--it is hard to know just which attributes are the most important and which contributes to the CA - while any single part of a firms resource configuration might be enviable--and even valuable--by itself, the CA is the result of all of them working in conjunction with one another in a complex web of interacting forces - as Barney points out, CA is not a commodity that can be bought and sold--it must be crafted, cultivated, and maintained; it must be delved with forethought, insight, and patience, as the relationships between causes and effects will often be ambiguous and the benefits and capabilities of resources will often be embedded within networks of social interactions - in short, the RBV (organizational side of strategic analysis) is more than a simple recipe for gaining CA--it is a tool for understanding how CA works, where it comes from, and under what conditions it can be sustained

Chapter 5

Analyzing Capabilities and Resources This chapter discusses strategic analysis from the internal point of view of the organization. Tools such as the resource based view and the value chain help firms to determine their own strengths and weaknesses (the first two letters of SWOT) against the competition in their environment.

Corporate-Level Strategy (Online Book)

BCG Matrix (Link) - Netmba's detailed explanation of the BCG Matrix Both Sides of Corporate Diversification (Link) - Gordon M. Bodnar, Charles Tang, and Joseph Weintrop explain the value created by both global and industrial corporate diversification Strategy Analysis of the Walt Disney Company (Link) - Yale School of Management case study of the Walt Disney company demonstrated how diversification and synergy can be powerful tools in gaining competitive advantage Diversification Strategy and Profitability (Link) - Richard P. Rumelt explains the profitability of diversification and the conglomerate organizational model Corporate Restructuring: a Boon for Competitive Advantage (Link) - G.C. Pathak's article makes a case for restructuring as a means for gaining competitive advantage - Corporate level strategy concerns what industries a corporation chooses to enter and why. Entering into multiple industries gives a corporation the power of diversification. Their different products in their different industries are more profitable together than individually because this diversity creates some new capability for the corporation. Corporate level strategy involves selecting the different industries a corporation should enter in order to best maximize the value of the corporate whole. - Managing multiple business units for a corporation is like an individual managing an investment portfolio, and the BCG Matrix illustrates it as such. This 2X2 matrix places business units according to their growth rate, and their strength in their particular industry. Using this matrix, a firm can decide what level to invest in its business units. - The challenge of corporate strategy is to find industries to invest in that will yield value greater than the investment it took to enter them. When acquiring other firms as a means of entering a market, a firm will either acquire it at less than its projected value or by acquiring a firm and then improving its net present value (NPV) through further investment. Acquiring a firm can be very costly, as there is often a premium involved with the purchase, and the buying firm must inherit all the operational costs associated with the purchased firm; therefore firms must carefully analyze potential purchases to make sure they are a wise use of resources. A firm would not go through all the trouble of acquisition if they did not expect their acquisition to increase the value of the corporation. Of course, acquisition is only one mode of entry. Firms can also create their own units from scratch in a new industry. This, like acquisition, is also very expensive, and requires the same caution and careful analysis. Either way, the goal is synergy. This is when the value of the whole is more than the summed value of the various parts. With a successful corporate strategy, the corporation is worth more than the total value of the individual business units. - Synergy is a resource like any other for a corporation, and it is very difficult to imitate or substitute. Thus, synergy provides a competitive advantage for corporations at the corporate strategy level. - The portfolio approach to corporate strategy is often associated with the conglomerate organizational model. This is described by Rumelt as companies that diversified into multiple, unrelated businesses through the acquisition of large numbers of business units. In this model the business units are largely independent, and as long as the corporation makes sure to acquire strong business units, it can be very successful. However, the conglomerate model is not an automatic success. With largely independent business units, there is little opportunity for synergy and without synergy a corporation will be worth less than the sum of its parts. - Another strategy at the corporate level is restructuring. This is where a corporation restructures its units by reorganizing assets and activities in order to unlock their potential. The key to this strategy is identifying underperforming units, knowing how to reorganize their assets and activities effectively, and having the discipline to carry it all out, including their ultimate sale. - Just as the relationship of the business units and corporation are important, so too is the relationship of the business units amongst themselves. An idea at the heart of this is transferring skills and transferring activities. One thing that connects every business unit in a corporation to each other is their access to the various resources the corporation can offer. Sometimes this sharing is more indirect, through the corporation, and sometimes it is direct from unit to unit. The ability of the units to share their resources amongst each other, and the corporation's ability to facilitate this sharing, can be key sources of synergy and so key components of corporate level strategy.

The Fallacy of the Better Mousetrap

Better mousetrap fallacy • "if a man can write a better book, preach a better sermon, or make a better mousetrap than his neighbor, though he builds his house in the woods, the world will make a beaten path to his door." - Ralph Waldo Emerson, 1871 - doesn't matter if the product is great, it needs to be desired and supported by the environment - What are the specific contexts in which the resources are valuable? - Successes reflect timely interactions - Better (product and services) mousetraps need to be noticed to provide value. - customers can only value that which they can see and appraise - the only products or services that can compete for a customer's business are those to which he or she as access - a better mousetrap, a better invention, a better technology, a better product, or a better service will not necessarily make a better and more profitable business - profits reflect timely interactions between products and services that customers find attractive and a host of other contextual circumstance that make those products and services valuable and difficult for other firms to imitate - even a truly better mousetrap might be ignored if it is never noticed by the market or it is improperly marketed to consumers who do not have mouse problem! - it is important to remember that resources themselves are no valuable intrinsically --their value derives from their use and the contextual conditions in which they are employed - resources are valuable in specific contests, under specific conditions, and in specific combinations - RBV should never be undertaken in a general and abstract way--doing so reduces the whole process to a quest for the "holy grail" - real and specific resources should be assess in relation to real and specific contextual conditions, just as competitive advantage should be assessed at the moment of the transaction

Challenges of Corporate Strategy (Her Notes and My Notes)

Challenges of Corporate Level - Making the value as a whole greater than the summed value of the individual parts. - Each business has value - commonly estimated using NPV -- (future cash, present value based on time value, risk and opportunity cost) Present value of future earnings, minus the amount invested) -- a function of 4 factors 1) Future cash flow that the business is expected to produce 2) Present value based on time value -- time value -- must know time horizon over which any cash flows will be realized 3) Risks and opportunity costs associated with those cash flows; cash flows that are uncertain have a lower present value than those that are more certain -- with those variables--the amount of future cash flows, the time horizon over which the cash flows are realized, and the risk level--the present value of the future earnings can be calculated -- present value is the minimum amount the owners would be willing to accept in selling the businesses -- similarly, a buyer would not want to pay more than the PV unless he or she saw some opportunity to increase future earnings 4) The amount invested -- investing too much (even in a good business with strong secure future earnings) can still yield a poor NPV -- similarly investing in a business with poor earnings and poor prospects might still yield a good return - Positive NPV investments are those where the present value acquired is greater than the value invested - SO, the challenge or opportunity is to either find businesses that are undervalued or to increase earnings of an acquired firm above the acquisition (firm value) value on which the acquisition value was based; and therein lies both the challenge and the opportunity of corporate strategy - Information asymmetry -- much more likely that the buyer will overpay than underpay - Acquisitions involve -- present value -- additional premium costs and then -- administrative costs (no matter what) - For corporate strategy to be successful - the value of the whole has to be worth more than the sum of the individual parts. - The net value of the business units must be increased as a result of their involvement in the larger corporation. - Entering a new business will usually result in lower value due to the new costs in administration - Regarding figure 7.2 on page 172: -- each business has a present value based upon its expected future earnings -- acquiring these businesses would require paying an amount equal to or grater than their present value -- the summed value of the three businesses, then, would be --- E (PVBA + PVBB + PVBC) - Read 7.1 on page 174 * - What is especially important to not is that all of these additional costs must be paid out of the earning streams of the combined businesses -- earnings will still come into the firm through only one source--the activities of the individual businesses--which means that there present value of the combined whole can be presented by the expression --- E (PVBA + PVBB + PVBC)-(AQC + ADC) --- AQC = total of the acquisition costs --- ADC = total of the new administrative costs - The only way that the value of the whole could be grater than the sum of the individual units is if the combination of those units somehow increased the net of their PV's - For corporate strategy to be successful, the value of the whole has to be worth more than the sum of the individual parts - That is the fundamental challenge of corporate strategy: to enter and manage businesses that are made more valuable through their inclusion in the corporation - Entering a new business or industry will most often consume value by imposing new costs - Many more effort at diversification fail than succeed - View SLIDE 14 & 15 OF LECTURE 1 CHAPTER 7 PDF -- Value = (npvBA+npvBB+npvBC) -- Value =(npvBA+npvBB+npvBC) - The challenge of corporate strategy transcends the MODE OF ENTRY into the new business or businesses -- the outcome of a corporate parent starting companies from scratch and growing them organically would not be any different than acquiring (as talked about previously) - The only way parent can be successful is by adding value that was not reflected in the original price - The challenge of corporate strategy is to take a business or asset with some known value and to strengthen its earnings ability, so as to make it more valuable as a part of the corporate whole than it was when operating independently - The result is a corporate whole that is worth more than the sum of its individual parts, an effect known as SYNERGY Synergy - For corporate strategy to be successful - the value of the whole has to be worth more than the sum of the individual parts. - "simply the additive effect whereby two things, with some known value, become more valuable through their combination than they were independently" - It will always be true that synergy will provide those businesses some ability to do things that they simply could not do if they were stand-alone businesses and not a part of the larger corporation - The net value of the business units must be increased as a result of their involvement in the larger corporation. - Entering a new business will usually result in lower value due to the new costs in administration. - If business units are not acquired, but grown within the company, diversification costs still exist. Value still needs to be added above the original price. - Synergy - Making the business units more valuable as a part of the corporate whole than it was independently. The effect when two things of known value become more valuable through their combination than they were independently. Synergy Methods - Reputations of business units - Sharing technological advances and systems - Coordination of raw materials for greater bargaining - Corporation as a whole can be seen as stronger and a safer bet for investors, resulting in lower cost of capital - Synergy can come from many different ways along the value chain and greater abilities by working together - Decisions about what to make or what to buy along the value chain also affect the corporate value. -- If less expensive to buy on the open market - supplier costs -- If less expensive to make internally - vertical integration on the value chain.

RBV - Competitive Advantage (Her Notes)

Coming from: - Differing capabilities a firm has due to the quality of the resources. - Some firms have become identified with the quality of their resources: -- Dell- online ordering -- Honda - high quality and engineering & reliability -- Bank America - ATM's -- The capabilities of the resources that identify the firm are Distinctive competencies.

Summary (Online Book)

Competitive advantage is best understood at the level of the individual transaction. Each individual transaction demonstrates both the customer's desire for a given product, relative to the alternatives, and the firm's ability to provide it at a cost that renders profit. It is the strategies that focus on improving these individual transactions that ultimately lead to the greatest success.

Corporate Level Strategy (Her Notes and My Notes)

Corporate Level Strategy - Is about the different businesses a firm chooses to enter and its intentions in entering those businesses - Each business and each business environment is unique - Competition in some industries will occasionally involve investments in others - Diversification - Involves choosing and managing all of the various business units in which a firm competes in such a way that the strength of the whole firm is maximized -- this may involve entering market and industries that are substantially different form its core business or entering businesses that have yet to show their full potential or that might seem unattractive on their own -- it may involve exiting businesses or redirecting investments as necessary to move the firm away from stagnant industries into newer growth opportunities -- may involve any number of such decisions in combination -- however, it will always involve viewing the firm as a whole and regarding its different business units as investments that add value both directly and indirectly - Competitive adv. may be in more than one product market - Multiple and different business units - Each unit can operates in its own industry - Each unit can operate with its own customers, - Each unit can operates in its own market dynamics. - Asks "In what businesses will the firm compete?" - Relates to the different business units in the company and the intentions of entering into the business units. -- Lets examine intentions - What was the intention of PepsiCo? - Each business unit is unique, but sometimes competition in one industry may lead to others. - Market power may be gained by diversification of business units, and not all units need to be profitable for the company as a whole to profitable. - Involves choosing and managing business units in the company so that the whole org. is profitable. - Each business unit is unique, but sometimes competition in one industry may lead to others. - Market power may be gained by diversification of business units, and not all units need to be profitable for the company as a whole to profitable. - Involves choosing and managing business units in the company so that the whole org. is profitable. Business Unit selection - Different than the core business - Full potential as a single business unknown - Existing businesses or new investments - Movement away from a current industry - Combination of intentions or decisions. Corporate Competition - Can have operations in: -- a variety of industries -- a variety of markets -- and with a range of competitors

Corporate-Level Strategy and Portfolio Management (Her Notes and My Notes)

Corporate Strategic Management - Early model Boston Consulting Group (BCG) model -- Evaluates the business units on two dimensions: 1) Growth rate of the business itself 2) Relative position in the market or industry -- Each business unit is evaluated on these 2 dimensions and then placed in the quadrants and where it is placed tells the corporation the strategic purpose and direction -- Business strategy in a simple framework. -- The performance of each business unit shows the attractiveness of the market and the performance of the business unit in that market -- Business unites that were slow growing were considered to be either "dogs," to be liquidated, or "cash cows," to be used as a source of investment capital -- Neither of these conditions warranted additional investment, however, because of their poor growth expectations -- At the same time, businesses that were growing rapidly were considered to be either "stars" or "question marks" -- Owing to their high growth rate, both of these types of business required substantial investment -- However, stars also had sound market positions and offered relatively certain and strong returns -- On the other hand, question marks were much more speculative and risky, while still being quite expensive -- Without significant improvements in their market position, question marks could not be sustained for long; with improvements, however, they became stars - This simple model was both powerful and important that it integrated the underlying principles of business strategy into a framework that could be sued to assess multi-business unit firms - The performance of each unit was a reflection of both the attractiveness of its market and its performance in that market - At the same time, there was more to performance of a whole corporation than just the strength of its units - A firm could not have just stars in its portfolio because stars required investment and so consumed capital -- Stars needed to be supported by cash cows, which also played a key role in the overall portfolio by generating the money for further investment -- Moreover, because the growth of stars would either inevitable decline, firms would constantly be seeking new stars through their investments in question marks -- Of course, as the new stars emerged, and as the growth rate of older stars declined, those older stars became cash cows -- As the cash cows became less attractive, they were liquidated and their resources plowed back into the development of new market and businesses - This framework, then, offered a picture of how multiple business units could work together to maximize the long-term performance of the firm - It illustrated how the value of the corporate whole could be inhaled through specific combinations of very different types of business Corporate Level and Portfolio Management - Boston Consulting Group (BCG) Matrix -- Early corporate strategy model -- The position of the business determines its strategic purpose and direction. -- is a simple 4-quadrant framework, with two dimensions on which business units are evaluated -- PICTIURE ON SLIDE 9 OF LECTURE 1 CHAPTER 7 PDF (STUDY STUDY STUDY THIS) More than Performance Measures - Corporate strategy can be seen as multiple business units working together toward the long-term performance of the firm. - Key Point: The value of the whole is greater than the parts. - Corporate strategy is about maximizing the value of an entire firm by managing which businesses it will be in and how those different business units will work in combination - Focuses on the value of the whole, as a result the performance and interaction of the various pieces - Business units, like individual investments, can be especially strong performers or they can perform not so strongly - In either case, though, the performance of each unit is secondary to ints contribution to the overall portfolio - Corporate strategy seeks to produce a more valuable corporation, where the value of the whole is greater than the summed value of the individual parts

Chapter 7

Corporate and Multi-Business Unit Strategy Online Book: For giant corporations operating in many different fields, the process of strategic management becomes even more complicated. They must manage their own corporate strategies as well as the strategies of their individual business units. This chapter examines the tools and processes by which a corporation manages its business units for both their betterment, and the betterment of the corporation as a whole.

Indirect costs

Costs that relate to the support functions — in other words, the activities that contribute indirectly to the revenue-generating functions of a firm.

Diffusion

Describes the process by which innovations are adopted and spread by firms and individuals other that the original innovator. The process was formally identified in 1962 by Everett Rodgers, who noted that diffusion occurs at different rates over the course of the introduction of a new product.

Summary (Her Notes)

Differentiated strategy - Increases and uses inelasticity by restricting options or - Increasing value of the product or service that others cannot match - Focus tends to be on unique features, service, or new products , marketing or promotion rather than price. Low-cost strategy - Reduces transaction costs for the buyer by reducing the cost of manufacturing. - Optimize all of the value chain activities - To capitalize on the elasticity of the demand - While seeking the lowest cost, an acceptable level of value still needs to be achieved. Both strategies - Success is determined by the customers perception of value in the context of all other alternatives.

Tutor2u Explains Consumer Surplus - A detailed explanation of the importance of consumer surplus and its ramifications (Introduction to Organizational Analysis)

From Online Book: What is consumer surplus? -- When there is a difference between the price that you pay in the market and the value that you place on the product, then the concept of consumer surplus becomes a useful one to look at. This is an important idea that you can use on many occasions in your exams. Consumer surplus and economic welfare -- Consumer surplus is a measure of the welfare that people gain from consuming goods and services Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price). -- Consumer surplus is shown by the area under the demand curve and above the price.

Exogenous

From the Greek exo, meaning "outside," and genes, meaning "production", The exogenous change is a change in the state of system from factors external to the model and not explained by the model.

Resource Based View (RBV) --online book

From the online book: Is the Resource Based View a Useful Resource for Strategic Management Research? Yes Jay B. Barney points out the positive aspects of the resource based view Toward the Development of Measure of Distinctive Competencies among Small Independent Retailers Mark Peterson's publication in the Journal of Small Business Management highlights the importance of distinctive competencies using the example of small, independent retailers The competition between rival firms for individual transactions lies at the heart of strategic management. Therefore, it is imperative that a firm makes their products or services more attractive in the eyes of customers. A product is more attractive to the extent that it is valuable and rare, and that attractiveness will continue until that value and rareness are either imitated or substituted. A valuable resource is anything that brings a company profit. These resources can be either tangible or intangible. It is important to look closely when analyzing a firm so as not to overlook intangible resources. Rarity focuses on availability to the consumer. A product may have high use value, but if every firm has it, then it is unlikely to lead to competitive advantage. However, even seemingly similar products may be seen very differently by consumers; so it is important to consider value and rarity in the eyes of the customer. Inimitability is another major issue in gaining competitive advantage. Even a great product can quickly lose its competitive advantage if it is easily imitated by a rival. A major issue concerning inimitability is diffusion. Firms are sometimes too quick to outsource certain aspects of their process, and this can undermine the uniqueness of their product. This is also a tricky area to analyze since it can only be truly determined by the consumer whether an imitation is effective. Non-substitutability is closely related to inimitability. A product may not be easily imitated, so a rival firm may try instead to substitute a new product or service in its place; this too can undermine competitive advantage. Since there are so many factors to take into account when pursuing competitive advantage, firms will often carve out a niche on which to focus and maintain as their one area of superiority. This is known as a firm's distinctive competencies.

Commodities

Goods of value and uniform quality that are produced by multiple suppliers, such that buyers see them as being interchangeable.

Returning to Competitive Advantage (Her Notes and My Notes)

Her Notes: - Any of the general approaches can bring about competitive advantage. - Provides scale of economies in the value chain activities. - Reduces cost to the corporation - Increases business unit profitability. - Often seen in administrative aspects of the corporation. My Notes: - Any one of those approaches can yield CA for the firm and so lead to strategic success - At a general level, they all contribute to success in the same basic way, strengthening value of the whole by increasing the net CA of the units - CA will be built upon one of the two generic sources of CA--differentiation or low-cost - Core competencies - Some combination of these approaches may just as easily yield low-cost-based advantage

Basics of Organizational Analysis

Her Notes: Competitive advantage occurs when an org. creates value for the customer at a level that provides profit to the organization. Three concepts related to value 1) Use value by the customer - subjective valuation - what the purchase is worth to the customer. 2) Value exchange - actual price paid for product or service 3) Consumer surplus - The net value the customer gets above and beyond the actual price. Using the Resource Based View, a portion of competitive advantage comes from the organization itself. * view slide 5 on Lecture 1 Chapter 5 PDF Organizational Analysis - When a customer chooses to purchase from Firm A rather than Firm B, the following are true: - There was some difference in the consumer surplus offered by Firm A and Firm B - That difference gives firm A a competitive advantage over firm B - That competitive advantage can be attributed to firm A's capabilities and resources.

Concluding Thoughts and Caveats (Related and Unrelated Diversification)

Her Notes: Related and unrelated diversification - Adaption of Rumelt's (1974) initial nine categories. - Related is generally thought to be the better of the two, but they are a case by synergy analysis. - Unrelated has few linkages in value chains - Unrelated conglomerate or portfolio generally only added cash stability and reduced risk- new value not added - Related - easier to achieve synergy through expertise and transferred or shared core competencies. My Notes: - He provided a framework for categorizing different types of diversification - Using 3 values his framework placed firms into one of the nine categories -- specialization ratio -- related ratio -- vertical ratio 1) single business 2) dominant-vertical 3) dominant unrelated 4) dominant-constrained 5) dominant-linked 6) related constrained 7) related linked 8) unrelated business 9) conglomerate - This elaborate framework has been abbreviated into two general categories 1) Related Diversification 2) Unrelated Diversification - Rumelt found that generally, related diversification produced better results than other types -- this may have to do with the ability of related diversifiers to transfer managerial expertise or to share various assists and skills - Because of their similarity, related diversifiers were simply able to achieve synergy more readily than non-related diversifiers - Related diversifiers do not always succeed and unrelated diversifiers do not always fail - The success of a diversification is a function of they synergy that the firm is able to realize - Diversification success is really about the creation of new CA and new profitability at the business unit level - The key in each case is the ability to share some resource, skill, or activity along the value chain, so that the net earnings of the business units are increased - While the possibilities for this sort of sharing may be more readily apparent and more easily achieved in related firms, they exist nevertheless in unrelated ones as well

Sharing Activities (My Notes and Her Notes)

Her Notes: Sharing Activities - Uses the concept of the value chain and each activity that can lead to competitive advantage. - Sharing activities involve two or more BU linking their value chains together - Sharing a common set of resources. - In highly diverse BU, sharing often takes the form of administrative consolidation. My Notes: - Builds on the same concept as transferring skills but takes the idea an additional step - Sharing actives involves two or more business units actually linking their value chains together and sharing a common set of resources - Advantage is that it provides scale economies in shared activity - Often takes the form of administrative of "backroom" consolidation - A highly diversified firm with a variety of unrelated business units may still share common legal resources, common human resource management, or common insurance resources - Firms that acquire new units may choose to consolidate their advertising expenses by using a single provider, so taking advantage of their increased bargaining power - A firm may decide to consolidate its purchasing function in an effort to get better prices or terms from vendors - The focus of activity sharing is to increase resource utilization and so reduce the cost of the activity to the business units involved - The result is greater earnings for the business and for the corporation as a whole

Transferring Skills (My Notes and Her Notes)

Her Notes: Transferring Skills - This approach is more about the business units relationship to each other (lateral connections across units). - Different BU leverage a single area of strength along the value chain to enhance the competitive advantage. - Diverse BU can also leverage a single strength - Connections across units can reflect relatedness of products and services. My Notes: - Concentrates more on the relationships among the business units themselves - Each of the activities from the value chain should be viewed as a potential source of CA - Transferring skills is an approach to corporate strategy where different business units leverage a single area of strength - Single area of strength becomes the source of synergy to the corporation, enhancing competitive advantage of the individual business units and making them more formidable competitors in their respective industries and markets - Even among business units that seem unrelated, there is an opportunity for synergy and the sharing of valuable resources and skills - The sharing of skills can be seen as enhancing CA of the individual units, enabling them to compete more effectively in their own industries - As a result of this resource sharing, the combined value of the corporate whole is greater than the summed value of the business units, had they continued to operate independently - Corporate strategy, then, may add value by capitalizing on the lateral connections across units - These connections may reflect the relatedness of the products and services or they may not--in every cause, though, the objective is to increase CA and earnings of the entire corporation by sharing the skills of some units with the others

Scarcity

In economic terms scarcity is defined as not having sufficient resources, goods, or services to fulfill the extant demand. By implication, then, scarcity implies that wants and needs cannot be satisfied simultaneously, which means that trade-offs must be made.

Inimitability -- Her Notes

Inimitability - Advantage from valuable and rare resources will diminish if imitated by competitors. - Diffusion of core capabilities can undermine competitive advantage -- many firms in the interests of lowering costs, are too willing to outsource key elements of their processes or products -- however, it is important to think about the long-term implications and the potential for imitation of the firm's basic competitive advantage-generating resources - Important to consider the long term implications for imitability and rarity. Is Sam's Cola an effective imitation of Coca-Cola? - It depends upon who you ask; for consumers who see little difference in the use value of different sodas, Sam's Cola is an effective imitation. - Understanding what is or is not an effective imitation means understanding the nature of the value that the product or service provides. - value and rareness can dissipate quickly if those resources are effectively imitated - use of common components makes it easier to imitate as well as easy access to those common components - understanding what is or is not likely to be effectively imitated means understanding the nature of the value that the product or service provides - as firms are able to develop, control, and sustain their hold on resources that are both valuable and rare, they are able to sustain their competitive advantage - inimitability simply means difficult, costly, or impossible to imitate or develop--resources that are imitable are not likely to lose their value through diffusion

Value chain

Made popular by Michael Porter (1985), value chain is a framework for illustrating the sequential activities in which firms engage to create value for the customers. However, it is a common and highly generalizable framework that applies in a multitude of settings.

Non-Substitutability -- Her Notes

Non-Substitutability - Imitating a valuable and rare resource can be difficult. Thus, it can makes sense to substitute it with some equivalent resource. - The ease of ability to substitute the value generating function of a resource reduces its value and its ability to sustain competitive advantage. - Once substituted, the value goes down - resources that have no obvious or direct equivalents are difficult or costly to substitute

Pepsico and the Restaurant Business

Online Book: PepsiCo and the Restaurant Business YUM! Brands Homepage (Link) PepsiCo Restaurants History (Link) - Timeline of major events in PepsiCo Restaurants PepsiCo Restaurant International (PRI) was a world leading fast food chain consisting of Taco Bell, Kentucky Fried Chicken, and Pizza Hut. PRI was created when the Pepsi Cola Company decided to buy into the quick service food industry as a medium for pushing their soda products. All three restaurants performed well and experienced solid growth, following their acquisition by Pepsi. By the mid-nineties, however, the market had matured and growth from PRI had begun to taper. It was then that CEO Roger Enrico devised a plan to spin off PRI from PepsiCo. The spin off created Tricon Restaurants (later YUM! Brands), and PepsiCo earned seven billion dollars. History (My Notes): - Pepsi merged with Frito-Lay in 1965 - Acquisition with Pizza Hut, KFC, and Taco Bell -- expansion of each of each restaurant brand into international markets by 1997 - By end of 1995 Pepsi established itself as the world's larges restaurant conglomerate The Tri-Con Spin-Off (My Notes) - This market began to show signs of maturity and same-store sales either flattened or declined in all three chains - The board agreed to the spin-off of the three chains into an independent publicly traded company - Board approved--and paved the way for PepsiCo to trim its holdings and restructure to focus on its primary business portfolio--soft drinks and snack foods - By the end of 1999 their revenues had declined by 1/3 but their earnings had risen by over $100 million - Tricon's name was officially changed to YUM! Brands and the company remains a global leader in the fast-food industry

Jay Barney (RBV) Presentation In Class

Presidential Professor, Department of Entrepreneurship and Strategy, University of Utah

Nature of Competitive Advantage -- Context - Changing Conditions (Her Notes and Mine)

Purchases (transactions) - Are determined by the specifics of the product and service - And the conditions or context of the purchase (outside the relationship of the buyer and seller): -- Related to taste of the consumer -- Change in economic conditions -- Availability of substitutes Changing Conditions - Changes in the environment - Result in changes in bargaining power - Context is always changing - Any shift in bargaining power My Notes: - Demand curves (mathematical functions that are used to illustrate the relationship between consumption and price) often shift in response to such things as change in customer tastes, changes in overall economic conditions, and the availability of substitutes -- shifts in demand curves select a fundamental alteration in the value that customer see in a particular product or service - Shifts can be completely exogenous (nothing to do with the buyers or with the products) - New technologies, new competitors, new products and services, changes in consumer tastes and in societal fashions, shifts in demographic patters, and changes in the economy all affect the context within which customers judge and value various products and services -- As a result, all of these sorts of changes affect CA - That is why it is so important to approach environmental analysis from a dynamic perspective - If there is a weakness in the way that environmental analysis is typically understood, it is the failure to take into account the dynamic and ongoing nature of change - Context matters to CA, and context is always evolving and changing - Bargaining power of buyers and sellers (how badly either group needs or wants a specific transaction) affects the values that customers place on a given product or service -- thus, shifts in any of the conditions that affect bargaining power will affect CA - The level of rivalry among competitors, which is driven by the relative level of supply and demand and the willingness of competitors to target one another's customers, will affect the value that customers place on a given product or service and so will affect CA - Even the ease with which new firms can enter the industry affects CA by imposing a time limit on the exclusivity of a firm's offerings

Rarity -- Her Notes

Rarity - the uniqueness of the product or service - no always obvious - What specifically are these rare resources? -- The answer lies in the eyes of any customer who would value any one of these stores over the others. - Assessing rarity may require going deeper, beyond the surface, than the plainly seen resources, value in the customers eyes may be subtle. -- it is often in these subtle differences that the greatest opportunity lies - must have more than value -- together, value and rarity provide great opportunity for competitive advantage and profit, as they give the seller a unique ability to supply some desired product or service - even in the face of apparent similarity, there are still nuances of dissimilarity that can make one or another store appear rare and unique - resources that are rare are held by just a very few--as such, when valuable resources are also rare, they are likely to be in great demand

Use value

Relates to the qualities of a product or service as perceived by the customers and in relation to their needs. These customer judgments about the value, attractiveness, and desirability are subjective and bound to the context in which they occur.

Box 5.3 on Page 121 *

Resource-based/Value-Chain Analysis in the Textbook Industry EXAMPLE READ IT !! HELPS TO UNDERSTAND PRIMARY FUNCTIONS 1) Inbound Logistics 2) Operations 3) Outbound Logistics 4) Sales and Marketing 5) Services SUPPORTING FUNCTIONS 1) Firm Infrastructure 2) Human Resource Management 3) Technology Development 4) Physical Plant and Maintenance

Chapter 6

Strategies for Competitive Advantage Online book: The goal of any strategic manager is to gain competitive advantage. However, no two competitive advantages are alike, and each is achieved through different unique strategies. This chapter explores some of the different strategies utilized by managers to bring competitive advantage to their firms.

Concluding Thoughts and Caveats (Online Book)

Strategy-Structure Database (Link) - Richard P. Rumelt's own explanation of his three ratios and nine categories for diversification Competition, Market Selection, and Growth (Link) - Vincenzo Denicolo and Piercarlo Zanchettin's article explains the market selection process and its effect on competition Daimler-Chrysler: Why the Marriage Failed (Link) - AutoObserver's theories on the failed merger between Daimler and Chrysler Multipoint Competition, Mutual Forbearance, and Entry into Geographic Markets (Link) - Lucio Fuentelsaz and Jaime Gomez's article explaining the complexities of multipoint competition and mutual forbearance - Diversification is generally described as being either related or unrelated. Rumelt provided the best known framework for categorizing diversification. Using three values, the specialization ratio, the related ratio, and the vertical ratio, Rumelt's framework placed firms into one of nine categories: single business, dominant-vertical, dominant-unrelated, dominant-constrained, dominant-linked, related-constrained, related-linked, unrelated business, and conglomerate. These categories have been generalized over the years into simply related and unrelated diversification. Firms with related diversification are generally thought to be stronger due to their ability to easily synergize and transfer skills and activities. There are, however, plenty of cases of related diversification failing and unrelated diversification succeeding. The key though is always synergy. - The goal of any corporation is to be worth more than the sum of its units. However, there are plenty of occasions where poor strategy can leave a corporation with a value that is lower than the sum of its parts. These corporations cannot grow, and thus cannot survive in the market. The market has a way of eliminating such corporations, and this phenomenon is known as market selection. A well known mechanism of this is the hostile takeovers. These takeovers are facilitated by corporate raiders, who while notorious, actually serve a necessary role. - There is an inevitable tension in any business unit between serving the corporate level strategy needs of the corporation, and serving the business level strategy needs of the business unit. Corporations often try to manage these dual responsibilities through a structural mechanism known as the "M-form." This is where the units operate "semi-autonomously." They are free to operate business level strategies, but only within the mandates determined by the corporation. - A merger, acquisition, or new venture that looks good on paper will not produce the desired effects unless the businesses can be effectively integrated. Thus, the attitudes of the employees, the cultures and styles of the combined firms, and the operating norms and practices are just as important to the success of a corporate strategy as the issues related to products and markets. Thus, all of these things must be taken into account in analyzing an acquisition or a diversification. Daimler's failed merger with Chrysler is a fine example of this. - Multi-point competition is a corporate level phenomenon where corporations compete across multiple business units. Since a business unit from a corporation has bargaining power over an independent due to the synergy it derives from its corporation, the independents will often become diversified in order to compete. Sometimes this can lead to mutual forbearance, where corporations will actually choose to compete less vigorously due to their broad interdependence. - Related and Unrelated Diversification - Market Selection - The M-Form Organizational Structure - Organizational Culture - Multi-Point Competition

Production possibilities frontier

The term used to describe a graphical depiction of the different combinations of goods that a rational producer can make with certain fixed amounts of resources.

Concluding Thoughts and Caveats -- Simple Supply and Demand? (Her notes and My notes)

Supply and Demand? - More than that, many possibilities, -- sometimes economic logic & sometimes choice determines performance (determinism vs. volunteerism) My Notes: - More than simply supply and demand--strategic management is more about managing the firm over the landscape described by economic theory -- the distinction, between simply allowing the invisible hand of economic logic to determine performance and purposefully exercising strategic choice and control over the firm, is the issue of determinism and voluntarism --- it is a distinction that often means more to theorists and researchers than it does to practicing managers--but it would be a mistake to overlook the issue altogether, because strategic success requires managing the interplay between these two sets of forces - Deterministic economic realities of the firm's environment are key factors -- understanding bargaining power, substitutability, barriers to entry, and elasticity is essential to formulating and implementing good strategy -- but just as important as understanding that none of these conditions fully fixed -- through purposeful strategic actions firms can create inelasticity, despite the availability of substitute products - Through purposeful strategic actions firms can find attractive spaces even in markets that are competitive and where bargaining power of the customer is extremely high - The opportunity and challenge of strategic management, is that there are always possibilities--but those possibilities emerge from the economic landscape -- Thus, the pursuit of CA involves the development and implementation of strategies that leverage a firm's resources in a unique and create way to create value for customers who live in and are influenced by the constellation of forces in the environment

The Ongoing Nature of Sustainability

The Challenge of a Sustainable Advantage -- Things change and resources that are valuable and rare today may be less so tomorrow. -- Resources that seem to have no value today might be very valuable in the future -- Over time, few resources retain their value and few will remain highly rare if they are highly valued. - depends on the competitive advantage, which also requires adapting and change - sustained CA is built upon resources that are valuable, rare, inimitable, and non-substitutable -- however, few resources retain their value and few will remain extremely rare if they are highly valued - most resources can be imitated or substituted, given sufficient time and motivation on the part of competitors - sustaining an advantage is still an important achievement as it allows the firm to reap greater profits and to realize greater returns - at the same time, no CA is sustainable indefinitely - sustainability is a fluid and continuously moving target--firms pursue it daily, yet they never all achieve it as each day the challenge is renewed - those firms that are in the lead, their ability to sustain that lead depends upon their ability to continue working harder than the firms behind them - the longer a CA can be sustained, the more profit the firm can realize from it - with time, the friction of the market, the drag of competitive rivalry, and the burden of constantly changing tastes and technology will undermine any CA, offering opportunity to new rivals and prompting in market leaders an incentive for adaption and change

The Value Chain -- Online Book

The Value Chain Quickmba.com's detailed explanation of Porter's Value Chain (go to website) Value Chain Illustration (go to website) Picture of the Value Chain * Video of value chain on Website ** The value chain was a tool developed by Porter for categorizing an organization's value-adding activities. The primary value generating activities are those which contribute directly to the creation, manufacture, marketing, sales, and service of products and services. These are related to a firm's direct costs. There are also support activities which are related to the indirect costs. These may not be as directly related to the product and marginal profit, but they are no less important to the firm's overall operation in production. The value chain is very helpful in analyzing both primary and supporting activities. Her Notes: - The Value Chain -- A tool for decomposing the value generating activities of an organization. -- The value chain is based on a simple but powerful idea, that the value customers see and the value that leads to profits result from a series of distinct but interconnected activities. ** view slide 6 of Lecture 2 Chapter 5 PDF

Monopoly power

The ability to charge above marginal costs, even in the presence of competition. Suppliers with monopoly power can behave as if they were monopolies because of the inelasticity of the demand for their products and services.

Direct Costs

The costs incurred by a firm's primary activities — in other words, the activities that contribute directly to its revenue-generating activities.

Industrial economic view

The explanation of competitive advantage provided by the field of industrial organization economics. I.O. economics, often referred to as the economics of imperfect competition, studies the strategic behavior of firms and the structure of competitive markets.

Exchange Value

The price paid by the customer and realized by the producer. It is the value at which the purchase or the exchange takes place.

Distinctive competencies

The specific capabilities of a firm that exceed the capabilities of its competitors. A unique location, a strong reputation, or a key technology are all examples of competencies that would be distinctive to a particular firm.

Dynamic capabilities

This perspective, as articulated by Teece, Pisano, & Shuen (1997), is the ability to develop and sustain competitive advantage through renewing competences so as to achieve congruence with a rapidly changing environment.

Primary activities

Those activities in the value chain that contribute directly to the products and services that customers see and buy. In the most common depiction of the value chain, the primary activities are inbound logistics, operations, outbound logistics, sales, and service.

Support activities

Those activities in the value chain that do not contribute directly to revenue but rather support those functions, such as operations, sales, or service, that do contribute directly.

Tangible resources

Those that can be seen and measured in an objective fashion. Locations, facilities, technologies, and finances are all examples of tangible, measurable resources.

Intangible resources

Those that cannot be seen and measured in an objective fashion. Reputation, culture, or visionary leadership are all intangible resources, neither immediately obvious nor easily measured or replicated, but still very important to organizational performance.

Nature of Competitive Advantage - Competitive Advantage at the Transactional Level

Three Factors to consider 1. Competitive advantage is a reflection of what the customer views as valuable -- firms cannot determine for themselves the value of their own resources and capabilities, products and services; those determinations must come from the market and from the collective actions of consumers 2. Determinations of value are context specific -- and so, CA must be a reflection of the context -- customer's don't exist in a vacuum and their determinations of value involve more than just the attributes of the products and services in question - past experience, competitive options, economic conditions, and monetary fads and fashions can all affect the context in which a customer assesses the options and makes the decisions to buy 3. Because value is a reflection of context, CA must be episodic in nature. -- CA occurs in specific competitive episodes, where the specific desires and tastes of buyers and the particular capabilities and resources of sellers meet, amid the ferment of contextual forces described earlier - As any of these conditions, whether for the buyer, the seller, or the context, change, so too is the nature of CA likely to change My Notes: - Viewed at the transactional level, CA is less about the firm and its attributes than it is a reflection of many interacting factors - "because no team can win a championship without winning multiple individual games, each individual game is a stepping stone to a winning season" --> no firm can perform well without earning multiple profitable transactions and by winning multiple competitive contests, over and over again, a firm ultimately outperforms its rivals -- winning then, is an episodic even that occurs on transaction at a time -- performance, on the other hand, is measured both in terms of single competitive episodes and as the aggregate result of many such episodes - It is also true in sports that games can be won by underdogs--teams with less talent or with some apparent disadvantage in terms of setting or competitive position - In business, the same is true: - CA is decided in the marketplace, in the midst of the competitive interaction among firms, as customers evaluate their options and make their decisions - In sports, the underdogs can and often do, win - Fortunately for underdogs, customers' decisions are not based on analysts' assessments or on measures of aggregate market strength but reflect their own individual values and judgements, along with the variety of options available to them - Firms can be substantial underdogs and yet still be effective competitors in specific episodes and circumstances (READ BOX 6.1 ON PAGE 141) - It is both important and helpful to understand CA as it is manifested at the transactional level - Adopting this perspective allows us to see clearly 3 fundamental attributes of CA ^^

Types of Competitive Advantage (Her Notes and My Notes)

Three Generic Strategies of Competitive Advantage - Generic strategies because competitive advantage was sought through these methods. - Easily viewed at the transaction level for buyers and sellers in relation to competitive advantage. - Inasmuch as every firm sought CA, and because CA was achieved through one of these basic means, these 3 approaches were labeled and are still referred to as generic strategies - Viewing these three generic strategies at the transactional level can help us to understand how and why they actually function and what each means for buyers, sellers, and the ongoing pursuit of CA 1) Focus 2) Differentiation 3) Low Cost (picture on slide 4 of Lesson 2 Chapter 6 PDF)

Value -- Her Notes

Value - Valuable resources are resources that consumers desire or resources that give a firm an ability to produce and deliver products and services that consumers want. Examples: - A good location for a hotel -- because it provides customers with convenience or allows them to be near some desirable destination - A good credit rating -- a resource that a firm could draw upon in building efficient facilities or acquiring choice locations - A key technology -- because it enables the delivery of customer service in a more efficient or more satisfying manner - Ability to provide online service -- because for many banks that results in a substantial amount of business - Valuable resources can be both tangible (as in the fleet of tractors and trailers used by a trucking company) and intangible (as in the reputation for reliability and expertise held by a surgical care center), but must lead to profit. -- in both cases, resources are valuable because they enable the creation and delivery of products and services that customers find desirable and worthwhile - Key point: to find the value, we need to look beyond just the visible resource to the customer. -- "involves looking beyond just the visible attributes and characteristics of a firm in an effort to discern the underlying drivers of the value that customers see" - valuable resources are used by firms to create products and services that customers find desirable--they allow firms to exploit opportunities and to respond to threats

Nature of Competitive Advantage -- Competitive Advantage Determined by the Customer (Her Notes and Mine)

Value is determined VRIO, but it must be desired and available to the customer. - Scarce -- value is a function of scarcity (insufficient supply to meet the existing demand) -- when something is scarce = not enough of it to go around -- scarcity reflects information about both supply and demand -- valuable resources must be scarce resources; but must also be resources that are demanded and demanded in meaningful amounts -- resources cannot be intrinsically valuable; rather, their value is defined by a combination of their desirability and their availability--the same is true for products and services; their value is reflect by the willingness of customers to pay for them - If there is a weakness in the RBV, it is this apparent TAUTOLOGY (A self-evident true statement with multiple parts that is true regardless of the truth of the parts) -- specifically, CA is though to be a reflection or resource value -- however, it is the ability of any resource to produce profitable transactions that makes it valuable in the first place -- thus, while the value of a resource is what leads to CA, it is also the ability of that resource to generate CA that makes it valuable -- as a result, it is impossible to identify reliably valuable resources A PRIORI because value is manifested only through the resource's use -- as a practical manner, then, value is determined by the customer, as it is customers who decide what is valuable to them and so what they will use and buy - Valuable resources are those that are desirable and available - Resources valuable and bought by the customer. - The pursuit of CA is about generating value for customers, not about the pursuit of special and uniquely valuable resources, products, or services -- resources are merely a means to an end; value to the customer is the end itself -- practically speaking, then, the challenge is to acquire and utilize resources that will create products and services which customers will value and for which they will pay - This is challenging b/c customers' tastes vary and change -- like trying to hit a moving target -- creating value is challenging too b/c a host of other competitors are all seeking to do the same thing and are often seeking to do it in the same way -- on top of that, selling products or services inevitably involves making at least some part of those products and services available for observation, inspection, and refinement -- in creating CA for themselves, firms often must provide for their competitors the very example by which those competitors can later challenge them - Development cost -- creating value is a challenge because much of the money and effort associated with product and service development must be invested prior to the introduction of the market - The pursuit of CA is an ongoing effort of trial and error, learning and adaptation, where customers are ultimately the arbiters of success, choosing which products, which services, and which resources are, in fact, the most valuable and which firms will have the greatest CA as a result

Summary (online book)

With this chapter the SWOT model introduced earlier is complete. Chapter Four dealt with the OT (opportunities and threats), which involves an external look at a firm's environment. This chapter looked at the SW (strengths and weaknesses), which involves an internal look at a firm's resources. These two analyses, when fit together, become a powerful tool in analyzing a firm and its competitive advantage.