decisions that senior management makes and the actions it takes in the quest for competitive advantage in several industries and markets simultaneously; addresses where to compete
Scope of the firm
boundaries of the firm along three dimensions: industry value chain (vertical integration), products and services (horizontal integration), and geography: Also thought of as economies of scale, economies of scope, and transaction cost
RFP (request for proposal), less than one yea
voluntary arrangements between firms that involve sharing of knowledge
most integrated; can be directed via command and control
SA - licensing, franchising, credible commitment (LT strategic decisions that is difficult and costly to reverse)
Industry value chain
depiction of the transformation of raw materials into finished goods and services along distinct vertical stages
Advantages of "buy" from markets
High-powered incentives (entrepreneurship)
Disadvantage of "buy" from markets
opportunism (companies learning about your strategy and using it to compete with you later),
enforcing legal contracts
Fully vertically integrated
all activities are conducted within the boundaries of the firm
firms that focus on only one or a limited few stages of the industry value chain
Backward vertical integration
moving ownership of activities upstream to the originating (inputs) point of the value chain
Forward vertical integration
moving ownership of activities closer to the end (customer) point of the value chain
Benefits of vertical integration
Firm can make command-and-control decisions
Coordinate highly complex tasks to allow for specialized division of labor
Creating a community of knowledge
Securing critical supplies
Facilitating and scheduling planning
Facilitating investments in specialized assets
Disadvantages of vertical integration
Low-powered incentives (hourly wages and salaries)
all costs pertaining to organizing an economic exchange within a hierarchy, including recruiting and retaining employees, paying salaries and benefits
situation in which an agent performing activities on behalf of a principal pursues his or her own interests.
Risks of vertical integration
increasing costs, reducing quality, reducing flexibility, increasing potential for legal repercussions (monopoly claims)
Alternatives to vertical integration
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
slowly wean yourself off of outside suppliers or inside suppliers as you change; don't switch all at once
Expanding beyond a single market
Product diversification - active in several different product markets
Geographic diversification - active in different countries
Product-market diversification strategy - both simultaneously
stock price of related-diversification firms is valued at greater than the sum of their individual business units
related through common resources, capabilities, and activities
variety of activities that are lightly linked
less than 70% of its revenues come from a single business and there are few, if any, linkages among its businesses
stock price of highly diversified firms is valued at less than the sum of their individual business units.
Diversification enhances performance by
Economies of scale -> lower cost (reduce cost)
Economies of scope -> increase value (increase revenues)
Reduce cost and increase value simultaneously (both)
each business unit falls into one area with Market Growth and Relative market share: Question mark, star, cash cow, and dog. Use cash cow to invest in question marks. Usually get rid of dogs. Try to make question marks into rising stars. Old tool, don't use. Only looks at current stuff.
Uses industry attractiveness on Y (Porter's Five Forces), Competitive Strength on X (CA using VRIO); useful to look forward. Low/medium/high on both axis. Can use different items on X and Y axis.
is an internal analysis, not external
joining of two independent companies to form a combined entity
usually destroys shareholder values, does not create CA
purchase or takeover of one company by another. Tend to be friendly
process of acquiring and merging with competitors
Horizontal Integration Benefits
Differentiation because it's value creation
Reduction in competitive intensity - favorably affects Porter's five forces for surviving firms
Lower costs - Achieving economies of scale
Increased differentiation - fill gaps in current product line
Horizontal Integration Sources of Costs
Increased potential for legal repercussions
Horizontal Integration Reasons to merge
Desire to overcome competitive disadvantage - gain economies of scale to compete with industry leader
Superior acquisition and integration capability - some firms are consistently able to identify, acquire, and integrate target companies (Cisco)
managers convince themselves of superior skills in face of clear evidence to contrary and try to acquire anyway
voluntary arrangements between firms that involve sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage. Not strategic if it does not have the potential to affect CA.
Relational view of competitive advantage
strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries. The CA is found in the interlinking of the firms, not in the individual firms themselves.
based on contracts between firms
at least one partner takes partial ownership in the other partner
Corporate venture capital
equity investments by established firms in entrepreneurial ventures. Goal is to gain access to new, disruptive technology
standalone organization created and jointly owned by two or more parent companies (HULU owned by fox, nbc, abc); strong ties, trust, and commitment. Can require long negotiations and investments
Alliance management capability
firm's ability to manage three alliance-related tasks concurrently:
Partner selection and alliance formation - able to select compatible and committed partners
Alliance design and governance - choose appropriate governance method (alliance, equity, joint venture, etc)
Post-formation alliance management - create resource combinations that obey the VRIO criteria. Someone has to actually manage this. Need to decide someone.
social structure composed of multiple organizations and the links among them (nodes and ties). Consists of strong and weak ties
# of ties firm has out of possible ties; improves firm performance
Strategic Network - High degree of Closure
most firms know each other and facilitates trust
Strategic Network - Structural holes
spaces where two organizations are connected to the same organization, but not connected to each other
Culture: Fun place to work
Disney-Pixar worked because they were similar companies
Underarmour competes well with Nike because of innovation
Know they're a good thing
process of closer integration and exchange between different countries and people's worldwide, made possible by falling trade and investment barriers.
company that deploys resources and capabilities in at least two countries
Foreign Direct Investment
firm's investments in value-chain activities abroad
strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world
Advantages of expanding internationally
Gain access to larger market- growth (a tactic)
Gain access to low-cost input factors
Develop new competencies
Disadvantages of Expanding Internationally
Liability of Foreignness
Low labor costs
strong legal/ethical pillars, well-functioning economic institutions like capital market and an independent central bank
Formal National institutions
political and legal factors from PESTEL
Informal National Institutions
social factors of PESTEL (norms, customs, culture, ethics
collective mental and emotional "programming of the mind":
how does a society deal with inequality among people in terms of physical and intellectual capability; high means allow inequality
Relationship between individuals in society (individual and collective pursuits) - low score means low individualism
High means masculine (competitive, assertiveness, and exercise of powers are cultural ideals), low means feminine (cooperation, humility, and harmony)
Ttolerance towards ambiguity and uncertainty. High means value clear rules
Disparity between home country and target host (low means low distance)
How to enter foreign markets
Exporting (low investment and control) - fast, good for first timers
Strategic alliances - licensing, joint venture, franchising (moderate investment and control)
Subsidiary - acquisition and greenfield (high investment/control) - slow
Assumption that consumer needs and preferences throughout the world are converging and becoming increasingly homogenous
opposing pressures for cost reductions (cost leadership) and local responsiveness (differentiation) to derive four strategies. These are TACTICS, NOT DIFFERENT STRATEGIES. First thing to look at with a client is to think about their current strategy, and then pick a tactic here that matches their current strategy.
sells same products or services in both domestic and foreign markets (low both forces) - good to just export
maximize local responsiveness (high local responsiveness, low cost reductions) - most like differentiation strategy
pursue global division of labor based on wherever best-of-class capabilities reside at lowest cost (high pressure for cost reductions, low pressure for responsiveness) - most like cost leadership strategy
Combine benefits of localization and global-standardization (high responsiveness, high cost reduction)
Assumption that geographic location alone should not lead to firm-level competitive advantage because firms are able to source inputs globally.
Porter's national competitive advantage framework
Competitive intensity on a focal industry
Related and supporting industries/complementors
describe a country's endowments in terms of natural, human, and other resources; natural resources often not needed
home market customers who hold companies to high standards contributes to national advantage
Competitive intensity on a focal industry
highly competitive environments at home outperform global competitors
Related and supporting industries/complementors
leadership in related and supporting industries can foster this.
group of interconnected companies and institutions in a specific industry located near each other geographically and otherwise linked by common characteristics.
• Research triangle park, NC
Most important of PESTEL for Global Expansion
Political and Economical are most important when looking at global expansion.
Mechanistic or organic
Structure building blocks
specialization, formalization, centralization, or hierarchy (don't have to memorize all characteristics about this, but understand basics of differences)
simple, functional, multidivisional
values, norms, artifacts (bullseye from center to outer)
If a company's values are family, then it's okay to have pictures (norms), and you'll find pictures in employees office (artifacts)
Culture learned through socialization. Strong cultures emerge when core values are widely shared among firm's employees and when norms have been internalized.
Cultures can come from founder imprinting, flow from its values
Can be a CA
Controls & Rewards
governances, inputs, outputs
"weird employees," premier online shoe store. Goal to have it be a fun company. Made $265 million when he sold first company. Companies with a strong positive culture tend to perform well.
longer the company exists, the more inertia they have; causes resistance to change.
Organization structure must follow strategy, but usually a firm's strategy often follows its structure due to inertia.
Strategy comes before structure
change will probably happen anyway
Organization structure must follow strategy, but usually a firm's strategy often follows its structure due to inertia.
Informal, decentralized companies are good
Target is mechanistic
organizational structure that groups employees into distinct functional areas based on domain expertise (R&D, finance, etc). Higher specialization -> higher productivity
is driven by the value chain
Each SBU has its own P&L, which makes it a SBU
Preferred method for implementing business strategy, but might need to be modified.
Functional strategy Drawbacks
lack effective communication channels across departments. Lack of linkage between function.
multiple SBUs or divisions (Target is organized like this, but not like a matrix)
Different corporate-level strategies require different organizational structures. Following related or unrelated diversification prefers an M-form.
Related diversification should centralize decision making at the top, while unrelated diversification should decentralize decision-making.
Key elements of organizational structure
degree to which a task is divided into separate jobs (high specialization in larger firms), increases productivity
captures the extent to which employee behavior is controlled by explicit and codified rules and procedures.
decision making concentrated at top of the organization. Slow response time, reduced customer satisfaction
Determines the formal, position-based reporting lines and stipulates who reports to whom (tall vs flat structure)
low specialization and formalization, flat organizational structure, and decentralized decision making (Zappos)
high specialization and formalization, tall hierarchy that rlies on centralized decision making. (McDonalds)
To Gain and Sustain competitive advantage etc
To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm's business strategy.
organizational structure in which the founders make all the important strategic decisions as well as run the day-to-day operations.
Narrow focus in terms of product/service offerings
functional structure. Matches will with business-level strategies like cost leadership, differentiation, etc. Preferred method for implementing business strategy, but might need to be modified.
Cost-leadership should have mechanistic structure
Functional is better for this (centralized decision making, well-defined lines of authority)
Differentiation: organic organization is better
International strategy should use functional organizational structure
Localization strategy should use multidivisional organizational structure
Global-standardization strategy should use multidivisional structure.
what is considered important
define appropriate employee attitudes and behaviors
Strategic control and reward systems
internal-governance mechanisms put in place to align the incentives of principals and agents.
define and direct employee behavior through a set of explicit and codified rules and standard operating procedures. SOPs and budgets are part of this
guide employee behavior by defining expected results, but leaves the means to those results open to the employees
Control placed on organization to direct employee action
Board is the check-and-balance with those who run the company
comprises the principles and standards that guide behavior in the world of business
general statements of how people should or should not act
character or decision making process that employees use to determine whether their responses to ethical issues are right or wrong.
observable actions of individuals
the process of choosing a path from a variety of paths known to be available
Management has the biggest influence over the company because it impacts the company day-to-day
corporate social responsibility pyramid (bottom to top):
• Economics is the base
• Legal - don't break the law
• Ethical responsibilities - do what is right, just, and fair
• Philanthropic responsibilities -corporate citizenship
increase profits so long as it stays within the rules of the game
Firms can do well ($) by doing good (CSR)
Governance can ensure the pursuit of a strategic goal, are mechanisms to direct and control a firm, and address the principal-agent problem
Two problems with hiring
adverse selection (wrong person), moral hazard (difficult to ascertain whether the agent will give his/her best)
Autonomy, mastery, and purpose
three major things from the video about incentives to work.
Talked about the pitch - be simple, ask women
has a book, you can follow his easy steps
Business Model Canvas
If you stay in your field and you are involved in creating a business model in your field, you will probably see this again. Very new. It's just like your strategic recommendation - made up of various parts that are a part of your recommendation.
Canvas is a tool that's new that allows you to visually create a business model and test it for reasonableness.
Point is that it's very simple - both a strength and a weakness
Strategic Business Plan
Basic Strategic Plan - strategy and culture of organization, internal and external elements, development of goals and objectives, organizational focus for competitive advantage (discussed in the strategic business plan, not business plan). Competition indicates it's a strategic business plan. Need metrics to fully explain why you have a competitive advantage.
Implementation, revision, and evaluation are in Analyze and Formulate
Prepare the organization (create the culture), including holding people accountable.
Reasons why Strategies Fail
Leadership is the biggest reason why strategies fail
Communication before work is the most important part of the process - communicating a proper plan is important.
25% of petroleum consumed in last 10 years
Average vehicle weight and horsepower has grown dramatically recently
Only emission from hydrogen fuel is water vapor
Hydrogen vehicles are not ready because storing hydrogen is hard, vehicles too expensive, fuel cells aren't durable yet
There is enough hydrogen energy sources in Iceland to produce all of iceland's needs
Cellulose biomass comes from waste products of plants - paper, wood chips, etc.
Cellulose Ethanol would have 0 emissions. Isn't being used right now because you can't easily transform biomass into ethanol.
MIT lab tries to reduce gas consumption by slightly increasing technology.
Average gas mileage has dropped since 1980s to 2007.
The "Hypercar" reduces weight without reducing size. 14 parts that lock together to be stronger than steel. Triples gas efficiency at roughly same cost. Made out of carbon fiber. Costs are too high to be produced en masse right now.
"Plug in hybrid" - more batteries and larger motor, needs less space for engine and gas tank. Can take energy from a wall socket.
Lithium ion have about 4x the energy density of previous batteries. More energy in its size.
Innovations & Breakthroughs Video
Development happened over linear and local
Now we live in exponential & global
Instagram was an exponential company.
Singularity University helps entrepreneurs see how they can impact billions of people within a decade
11 years later, computers can perform as many calculations a second as humans, and 25 years later, can perform as many as the entire human population
Believes in passionate small teams - can solve grand challenges.
First X Prize was 3 people into space 2 times in 2 weeks
We are in way more abundant times now than before - information, technology, less wars, etc.
Innovation is a "state of mind"
New Rules of Innovation
Innovation is the process by which we change the world. Making things better in meaningful ways.
Failure to innovate in corporations is a result of prudent management; innovation better handled by individuals.
Best way for companies to innovate is to hire great people.
Innovation is happening at an unprecedented pace and it'll continue to accelerate because of these five trends:
• Trend 1: trend from owning products to accessing experiences (paper copies of books to e-copies)
• Trend 2: business unusual (kickstarter)
• Trend 3: Digital fabrication - design in computer and produced with computer technology; where we can make them is important
• Trend 4: The Rise of Information - internet contains tons of info; lots is still localized online; both source and how we gather information has changed
• Trend 5:Computing is the cheapest asset you can employ against any problem
Computing isn't a scarce and previous resource; it's an infinite resource
School Kills Creativity
Believes we stifle creativity.
If you're not prepared to be wrong, you won't come up with anything original.
We are educating people out of their creative capacity
"Purpose" of education is to produce "university professors"
We know 3 things about intelligence: it's diverse, dynamic, distinct
Most common reason organizations fail is because of poor leadership. Most failures of leaders are failure of self-leadership.
Must be a good follower.
Context is the same for every person: everyone wants to make the world a better place, want to do something that you actually want to do
Purpose of values - principles that lead you to success and happiness
BB&T Has 10 values
1. Reality - what is, is
a. Law of causality - everything in nature has a nature, and you must act in accordance with that nature
2. Reason - objectivity
a. Quality of premise directly affects quality of conclusions
b. Concept-formation makes the human mind very powerful; how well you define your concepts determines how well you think
3. Independent thinking
a. Don't view yourself as a victim; you are in control of your situation
b. You need to help your employees learn how to control their situation, not control your employees
4. Productivity - gut-level commitment to get the job done
5. Honesty - simply be consistent with reality
6. Integrity - if you believe something, do it; take a long-term perspective to life
7. Justice (fairness) - those that contribute the most should receive the most
9. Self-esteem - reason people fail is because they don't have self-esteem and motivation
a. Capable of being good and moral right to be happy
b. You have a fundamental right to your own life
c. Only long-term results are win-win or lose-lose; people will always leave win-lose situations
10. Teamwork / Mutual Supportiveness
a. Do your own job well
b. Root for fellow teammates to be successful
Emotions are important. Emotions reinforce knowledge, but are not a means to knowledge.
Achieving mastery is done through doing something over and over again.
Favorite book is Atlas Shrugged by Ayn Rand.
Single-biggest driver of success and happiness is having the right principles.