Strat 5700 Midterm 1 (Ch. 1-5)
Terms in this set (93)
A firm's theory about how to gain competitive advantages
When a firm is able to create more economic value than other firms.
(customers willing to pay a premium, such as Nordstrom) vs.
(lower costs of production/distribution, such as Walmart)
Most advantages are temporary.
People may have an
aversion to firm
Firm may have
Measuring Competitive Advantage
Superior economic performance.
Two types: Accounting measures (ROA, ROS, ROE) vs. Economic measures (earning a return above cost of capital)
An organization's mission/vision should drive its strategy formulation
How an organization views its
relationship with stakeholders
(Public Benefit such as community hospitals vs. Private Benefit such as drug companies)
• Identifies those stakeholders most important to the organization and the benefits to be conveyed to them.
• Acts as a commitment to stakeholders and drives organizational strategies
Competition such as public hospitals vs. Collaboration such as public health clinics
Importance of Mission, Vision, Values
"...Visionary firms earned
substantially higher returns
...many of their mission statements suggest that profit maximizing, although an important corporate objective, is not their primary reason for existence. ... their primary reasons for existence are typically reflected in a
widely held set of values and beliefs that inform day-to-day decision making.
Those groups who depend on the organization to fulfill their own goals, and on whom the organization depends.
: Customers, suppliers, governments
: Employees, investors, board
Express the ethics that guide a firm's actions, processes, and direction. They should be the final metric by which an organization determines its success or failure.
Memorable, visible, tangible
The enduring foundation of strategic direction and reflect the organization's values.
Should at least contain:
Services/products offered, values/standards, markets in which the firm operates
The desired future state of the organization.
short, memorable, understandable
External analysis allows firms to:
• discover threats and opportunities
• understand market imperfections
• better understand the nature of competition in an industry
• correct biases and misunderstandings
Examples: Interest rates, demographics, social trends, technology
Internal analysis provides a comparative look at
a firm's capabilities.
Internal analysis helps a firm:
• determine if its resources and capabilities (strengths & weaknesses
• establish strategies that will exploit strengths & improve weaknesses
• Identify "core competencies
Examples: Human resources, manufacturing capabilities, technology
A strategy is only as good as its
! Shows how the strategy will be carried out, who will do what, organizational structure and control
Strategic Management Process
Mission -> Objectives -> External/Internal Analysis -> Strategic Choice -> Strategy Implementation -> Competitive Advantage
Mission should be throughout the ENTIRE process
The strategic management process leads managers to intended strategies.
Align actions with mission/vision, predict resource needs, allocate capital and personnel, position organization in competitive space.
Characteristics: Long-term perspective, low uncertainty, clear mission, slow changes in technology or consumer preferences
Conditions often change or new information becomes available, so managers respond and adopt emergent strategies.
Understand competitor's strategy, evaluate own strategy, enhance organizational learning.
Characteristics: Short-term perspective, high uncertainty, unclear mission, fast changes in technology or consumer preferences
A group of sellers whose products are close substitutes
A group of
buyers and sellers who exchange goods and services for a price
Organizational market characteristics that have a strategic influence on the intensity and form of competition
Used as part of external analysis to analyze industry.
: Number of competing firms, homogeneity of products, cost of entry/exit
: Strategies firms pursue to gain competitive advantage
: On a firm level, look at competitive advantages/disadvantages or parity. On a societal level, look at level of employment, progress.
Four Market Structures
• Perfect Competition
• Monopolistic Competition
• MANY organizations
• HOMOGENEOUS products
• MANY substitutes
• PRICE strategic focus
• NO barriers to entry
• NO ability to influence price
• SIGNIFICANT level of competition (based on price)
• MANY organizations
• SIMILAR products- but not identical
• SOME substitutes
• DIFFERENTIATION strategic focus
• LIMITED barriers to entry
• SOME ability to influence price
• SOME level of competition (based on differentiation)
• FEW organizations
• SIMILAR OR IDENTICAL products
• SOME substitutes
• MARKET SHARE strategic focus
• HIGH barriers to entry
• SIGNIFICANT ability to influence price
• SIGNIFICANT level of competition (not based on price)
• ONE organization
• HOMOGENEOUS, LIMITED products
• NO substitutes
• DETERRENCE strategic focus
• HIGH barriers to entry
• SIGNIFICANT ability to influence price
• NO competition
Porter's Five Forces
• Industry competitors
• Threat of new entrants
• Power of buyers
• Power of suppliers
• Threat of substitutes
Threat of New Competition
If firms can easily enter the industry, any above normal profits will be bid away quickly.
• Barriers to entry lower the threat of entry.
• Barriers to entry make an industry more attractive.
Barriers to Entry
Factors that make it difficult to enter a market.
Examples: Economies of scale, product differentiation, cost advantages, government policies, proprietary technology, managerial know-how, favorable access to raw materials, learning-curve cost advantages, switching costs, access to distribution channels, non-recoverable capital investments
Threat of Existing Competitors
Attributes of an Industry That Increase the Threat of Direct Competition:
• large numbers of competitors
• slow or declining growth
• high fixed costs and/or high storage costs
• low product differentiation
• industry capacity added in large increments
Threat of Substitutes
Substitutes fill the same need but in a different way.
- Coke and Pepsi are rivals, milk is a substitute for both.
• Substitutes create a price ceiling because consumers switch to the substitute if prices rise.
Increases price competition
• Substitutes will likely come from outside the industry—be sure to look.
Threat of Suppliers
Powerful suppliers can "squeeze" (lower profits) the focal firm.
Industry conditions that facilitate supplier power:
• small number of firms in supplier's industry
• highly differentiated product
• lack of close substitutes for suppliers' products
• supplier could integrate forward
• focal firm is an insignificant customer of supplier
When a company expands into different areas on the same production path (such as when a manufacturer owns its supplier). Can help with
Threat of Buyers
Powerful buyers can "squeeze" (lower profits) the focal firm by demanding lower prices and/or higher levels of quality and service.
Industry conditions that facilitate buyer power:
• small number of buyers for focal firm's output
• lack of a differentiated product
• the product is significant to the buyer
Increases if switching costs are low.
Increase the value of the focal firm's product.
Example: Goodyear tires on a Corvette
• large number of small firms
• no dominant firms
• no dominant technology
• commodity type products
• low barriers to entry
• few, if any, economies of scale
Exploiting Fragmented Industry
• buy competitors
• build market power
• exploit economies of scale
Costs to a firm to exit a business
• new industry based on break-through technology or product
• no product standard has been reached
• no dominant firm has emerged
• new customers come from non-consumption not from competitors
Exploiting Emerging Industry
• first mover advantages
• locking-up assets
• creating switching costs
Product Life Cycle
Emerging --> Growth --> Maturity --> Decline
• slowing growth in demand
• technology standard exists
• increasing international competition
• industry-wide profits declining
• industry exit is beginning
Exploiting Mature Industry
• refine current products
• improve service
• process innovation
• industry sales have sustained pattern of decline
• some well-established firms have exited
• firms have stopped investing in maintenance
Exploiting Declining Industry
• market leadership
Strengths, Weaknesses, Opportunities, Threats
Best when an organization has previously gathered their internal and external data and uses the SWOT method to jointly analyze and make sense of the internal and external environment.
• Extremely flexible and can be conducted with little preparation
• Used in a variety of situations and contexts
• Initiated often without thought for needed background and trend information.
• Participants arrive with only their existing ideas and perspectives, which may reflect their biases and misperceptions.
• Strong personalities may inappropriately influence the results.
• May not be an obvious way to transform the SWOT output into actionable strategies.
DIRECTLY RELATED TO FIRM'S MISSION AND VISION
Things a company are good at doing or a characteristic that gives it an important capability.
Examples: name recognition, patents that hold rights to key technology, cost advantages, skilled employees, and loyal customers, among other competencies
Things a company does poorly compared to its competitors or just fails to do.
Examples: poor reputation and market image, older facilities, poor customer relations, and inefficient operations
Political, Economic, Social/cultural, and Technology
• An analytical method for deriving driving forces.
• Conducted much like a SWOT process, but participants examine each area sequentially to provide a more detailed environmental analysis, including the driving forces for each category
Force Field Analysis
Identify and understand key forces that may influence a desired action or goal. Forces that promote change should be leveraged; while those that hinder may be mitigated.
- What factors account for our present situation?
- What factors are keeping us from accomplishing
- What factors are helping achieve our goals?
To better understand and prepare for different futures.
• Often difficult to predict and adapt to major environmental shifts.
• Old Arab proverb that says, "he who predicts the future lies, even if he tells the truth."
Four-Firm Concentration Ratio
The percentage of the value of sales (market share) accounted for by the four largest firms in the industry.
The range of concentration ratio is from almost zero for perfect competition to 100 percent for monopoly.
• A ratio that exceeds 40 percent: indication of oligopoly.
• A ratio of less than 40 percent: indication of monopolistic competition.
The Herfindahl-Hirschman Index (HHI)
The square of the percentage market share of each firm summed over the largest 50 firms in a market.
- A market with an HHI less than 1,000 is regarded as competitive.
- An HHI between 1,000 and 1,800 is moderately competitive.
Limitations of Concentration Measures
• The geographical scope of a market
• Barriers to entry and firm turnover (data from point in time)
Developed to answer the question: Why do some firms achieve better economic performance than others?
• assumes that a firm's *resources and capabilities
are the primary drivers of competitive advantage*
Uniqueness comes from
and capabilities of a firm.
• tangible and intangible assets of a firm
» tangible: factories, products intangible: reputation
• used to conceive of and implement strategies
• a subset of resources that enable a firm to take full advantage of other resources
» marketing skill, cooperative relationships
Four Categories of Resources
l* (cash, retained earnings)
l* (plant and equipment, geographic location)
n* (skills and abilities of individuals)
l* (reporting structures, relationships)
Critical Assumption of the RBV- Different firms may have different resources.
Critical Assumption of the RBV- It may be costly for firms without certain resources to acquire or develop them.
» Some resources may not spread from firm to firm easily.
Four Important Framing Questions:
Internal activities and/or functions that are central
to fulfilling a company's mission.
• Created by superior resources that are put to use in a way that other firm can find difficult to replicate.
• Fundamental to a firm's success.
• Firms should identify and concentrate on only three to four core competencies
The strategic decisions and actions of firms in response to the strategic decisions and actions of other firms.
Economies of Scale
Average cost per unit falls as quantity increases—
until the minimum efficient scale is reached.
More for industries with high fixed costs vs high variable (marginal) costs.
Diseconomies of Scale
Can occur when maximum capacity reached and
a "lump" cost must occur to expand capacity.
• occur when firms become too large and bureaucratic
• are a risk of international expansion
Learning Curve Economies
A firm gets more efficient at a process with experience.
• The more complicated/technical the process, the greater the experience advantage.
Differential Low-Cost Access to Productive Input
May result from:
• history—being in the right place at the right time
• being first into a market—esp. foreign markets
• natural endowment—owning a mineral deposit
• locking up a source—buying all of its output
Technology Independent of Scale
• may allow small firms to become cost competitive
• advantage typically accrues to the "owner" of the
technology—may or may not be the ones who actually use the technology
• size of the advantage depends both on how valuable and protectable the technology is
Firms get to choose how they will serve the market.
• We'll offer level of quality that is inexpensive to
• Firms can make policy choices that give people incentives to reduce cost at every opportunit
Sources of Cost Advantage
A source of cost advantage will lead to competitive advantage if that source is:
• Costly to Imitate
• Organized (Implemented Appropriately)
Rareness of Source of Cost Advantage
The rareness of a source of cost advantage depends heavily on the
industry life cycle
Low Cost Conditions
Unbalanced Industry Capacity and Demand
Highly Observable Technology
High Cost Conditions
Balanced Industry Capacity and Demand
Path Dependence (Historical Uniqueness)
Highly Unobservable Technology (Causal Ambiguity)
Relational Exchange (Social Complexity)
1) the division of management responsibilities
2) the establishment of reporting relationships
Policies intended to influence behavior—align the interests of the individual with the interests of the organization
Owner / Manager
• Owner/Manager makes all major decisions
directly and monitors all activities.
• Difficult to maintain this structure as the firm grows in size and complexity.
Functional Structure (U-Form: Unitary)
Divides management responsibilities by function
• marketing • finance • accounting
• procurement • production • R&D
• HR • logistics • and so on
CEO is the only executive with enterprise-wide perspective. CEO is responsible for strategy and coordination of functions.
CEO can use this structure to: • ensure best cost reduction practices are shared among divisions
• allow and encourage decision-making by those who are in the best positions to do so—those close to decisions
• ensure that functions are coordinating efforts in pursuit of a common strategy
Facilitates cost reduction.
Multi-Divisional Structure (M-Form)
• Functions are replicated in each division as appropriate.
• This structure makes sense when the firm is involved in more than one business or has grown large enough
to justify geographic divisions.
• CEO has strategic responsibility with the help of vice presidents, and so on—information is filtered through layers.
• CEO balances coordination and competition among divisions.
Organizes employees into both functional and project/product groups. Personnel are assigned to a project or product that is managed by a manager, but staff also report directly to their functional department
- improve coordination and communication that
break down "silos" that can form in functional
- Two bosses may have divergent goals
• budgeting policies
• credit policies
• spending policies
• travel policies
• purchasing policies
• leadership styles
• stock options
• bonuses based on:
- cost reduction
- financial performance
• non-monetary awards
- parking places
- office decor
Compensation Policies Should Reinforce Formal and Informal Management Controls
Business Level Strategy
How to position a business in the market?
A business level strategy intended to:
• increase the perceived value of the focal
firm's products and/or services relative
to the value of competitor's products and/or
• create a customer preference for the focal firm's
products and/or services - IN MIND OF CONSUMER!
Corporate Level Strategy
Which businesses to enter?
Bases of Differentiation
can be a base of differentiation.
• tangible thing (product features, location, etc.)
• intangible concept (reputation, brand (Virgin), etc.)
• limited only by managerial creativity
1) Product Attributes
2) Firm—Customer Relationships
3) Firm Linkages
• exploiting the actual product
• exploiting relationships with customers
• exploiting relationships within the firm and/or relationships with other firms
y*—multiple functions on a watch
Timing of Introduction
n*—being the first to market
n*—locating next to a freeway exit
n*—Fezzari's 23 step customization
g*—creating brand loyalty to Nike
n*—sponsoring community needs
to engender positive community response
Linkages among Functions in the Firm
m*—using a circuit board designed in one division in other
Linkages with other Firms
s*—a sporting goods store
sponsors a benefit race by donating running shoes and receives free radio advertising in return
x*—a furniture store begins to sell
home gym equipment, computers, and lawn mowers
s*—a doughnut shop begins to sell its doughnuts through gas stations, vending
Service and Support
t*—an oil change shop begins to offer pick up and delivery of cars in an
office building's parking garage
VRIO: Is it
Fragmented Industry: Branding
Emerging Industry: First-Mover Advantage
Mature Industry: Refining Products or Adding Services
Declining Industry: Exploiting Niches
VRIO: Is it
Assume rareness if:
• a product is differentiated, it is rare
• customer preferences are evidence of a differentiated product
- increased volume of purchases
- and/or a premium price
VRIO: Is it difficult to
Logic of costs of imitation
• If would-be imitators face a cost disadvantage of imitation, they will rationally choose not to
Sources of costs of imitation
• causal ambiguity
• social complexity
• historical uniqueness
VRIO: Is the firm
to exploit it?
• Some substitutes may be obvious.
• Some substitutes may not be obvious.
• If no substitutes are obvious, then we would conclude that imitation through substitution will be costly—at least for the present time.
• If a base of differentiation is valuable, others will attempt to imitate it through duplication and/or substitution.