MGMT 408

Terms in this set (128)

Analyses
-Of strategic goals
-Of the internal and external environment
Decisions
What industry should we compete in? (Corporate Strategy)
How should we compete in the chosen industry? (Competitive Positioning)
Actions
Recommendation about actions that must be taken
deliberate strategy
deliberate strategy only gets executed partially, while emerging elements complete the realized strategy...
Four Key Attributes of Strategic Management
-Directed towards the overall organizational goals
-Includes multiple stakeholders in decision-making
-Requires incorporating both short and long term perspectives
-Involves trade-offs between effectiveness and efficiency
Operational effectiveness
refers to the extent to which firms perform similar activities better than rivals
Do same thing, but do it BETTER
Strategy
refers to performing different activities from rivals or performing them in a different way
Sell same stuff, but differently
Sustainable competitive advantage
-Achieving profits above the industry average is extremely difficult, particularly over a sustained period of time
have both operational effectiveness and a superior strategy
Strategic decisions
affect the whole firm and involve creating competitive advantage (these are harder to imitate)
Operational decisions
help make strategic decisions work - they translate strategies into areas of action (i.e., human resources, finance, marketing, R&D, manufacturing) - (these are easier to imitate)
criteria for identifying Strategic decisions
-Does the decision deal with identifying a new business area - or the future direction of the firm?
-Does the decision affect the firm as a whole?
-Does it have a significant financial impact on the firm?
-Would it evoke a significant response from competitors?
Our goal is to develop a strategic perspective so we can make recommendations that lead to firm-level competitive advantage
fundamental fact in Strategy
profits vary across industry and within industry
Industry profitability
relatively stable over longer periods of time
Firm profitability
shows greater variation over time, but tends to be stable and high for some firms, and stable and low for others
Strategic Decision Makers
is to analyze the determinants of firm long-term performance and make recommendations to achieve high performance
Industry Analysis
How competitive forces shape strategy: The general and competitive environment
The General Environment (broad)
The general environment is the big picture that the firm has little control over
i.e., the war in Afghanistan
i.e., interest rates
i.e., outcome of a presidential election
General environment into six segments
-Demographic
-Socio-cultural
-Political/Legal
-Technological
-Economic
-Global
Demographic: Root of many changes's in society
-Aging population
-Rising or declining affluence
-Changes in ethnic composition
-Geographic distribution of population
-Greater disparities in income levels
Sociocultural: Influence the values, beliefs and lifestyles of a society
-More women in the workplace
-Increase in temporary workers
-Greater concern for fitness
-Greater concern for the environment
-Postponement of marriage and/or starting a family
Political/Legal: Influence Regulation
-Americans with disabilities act
-Increase in minimum wage
-Increase in taxes
-Deregulation of industries (e.g., airlines)
Technological: New products/services or new processes
-Internet
-Pollution/global warming
-Wireless communication
-Nanotechnology
Economic
-Interest rates
-Unemployment rates
-Stock market
-Strength of currency- Our $1 is high, good purchasing power for us
Global
-Increasing global trade
-Free trade policies
-Emergence of BRIC economies, especially -India and China
-Trade agreements (e.g., NAFTA, EU)
General Environment segments
-The segments in the general environment affect each other
-The impact of a segment varies across industry
Ex. Political/legal regulation with respect to healthcare has a bigger impact on Pharmaceuticals than it does on Computers
Important to remember that these are areas over which the firm has little influence.
Competitive environment (task environment)
is the environment over which the firm can exercise some control
-To which level of analysis does the five forces framework apply - the firm, the industry, or the country?
-What is the main purpose of the five forces framework?
-How can we draw industry boundaries?
-In practice, how can we tell the difference between Rivals and Substitutes?
What is the structure of firms to make it profitable
Michael Porter
-Economist/Strategist
-PhD economist
-Harvard University Professor
-Head of Institute for Strategy and Competitiveness
Industry structure
-a function of strategic decisions made by the firms in the industry
Why is industry structure important
Varies profitability
-determines long-term average profitability
Industry
Defined based on similar products that have common suppliers and buyers
Suppliers
Organizations that firm in the industry PAY
Key Issue: Can Suppliers exert power over industry firms?
If Yes - they can raise the costs that industry firms face
If No - then industry will be able to keep costs low
Buyers
Organizations that PAY firms in the industry
Key Issue: Can Buyers exert power over industry firms?
If Yes - then industry firms will be forced to charge lower prices
If No - then industry will be able to charge high prices to the buyers
Substitutes
Stuff that could be alternative to the industry's products
Ex. Industry soda. Subsitute= juice
Potential Entrants
Firms that could enter the industry
Difficult to enter= Ex. Pharmaceuticals- $$ and regulations
Rivals
Firms that are competing within the industry
Ex. Pepsi vs Coke
Determines who gets the profits that the industry could potentially generate
Power of Buyers, Suppliers, Industry Rivals
Determines whether the industry value chain can generate any profits at all
Threat of Entry, threat of Substities
Suppliers/Buyers can gain profit if they:
-are very price sensitive
-have high bargaining power
Major factors about power of buyers and suppliers
-Number, size and concentration of suppliers / buyers
-Credible threat of forward/backward integration
-Existence of acceptable alternative supplies/ goods or services to buy
-Importance of supplier to industry/ industry to buyer
-Importance of industry to supplier/ buyer to industry
-Extent to which product is standardized or differentiated
-Switching costs
How factors affect Supplier Power
Many suppliers --> low power
Small suppliers --> low power
Good alternative suppliers-->low power
Supplier not important to industry--> low power
Industry very important to supplier--> low power
Standardized products --> low power
Low switching costs--> low power
How factors affect Buyer Power
Many buyers --> low power
Small buyers --> low power
Good alternative suppliers -->low power
Buyer not important to industry--> low power
Industry very important to buyer -->low power
Differentiated products -->low power
High switching costs--> low power
Switching costs
the "costs" that customers must bear when they try to switch from one product to another
Ex.
- It is difficult to switch banks once you have established a relationship
-It is difficult to switch architects once building has begun
Threat of Substitutes
The level of threat depends on relative price to performance ratio of the industry's products and those of substitute products
-If substitute products increase in value (e.g., because of innovation) or decrease in price then the threat of substitutes will rise;
-This means that the price of the industry's good will have to fall in order to continue to sell the same amount (thus reducing profits).
Substitutes Vs. Rivals
-Rivals include all of the firms that compete in the same industry
-Substitutes refer to products that are outside the boundary of the industry
Sometimes the boundaries of the Industry are blurry- Important to clearly state the boundaries of the Industry
Intensity of Rivalry
Does competition among the industry rivals squeeze potential profits out of the industry.
Rivalry Factors
-# of rivals
-size of rivals
-industry growth
-high barriers to exit
-switching costs
Barriers to Entry
Key issue: How easy is it for new firms to enter the industry and become rivals?
Why do entry barriers matter?
If entry barriers are low the firms could more easily enter the industry and compete away the profits
-If HIGH the threat of entry is LOW
Porters Five Forces
-Determines the Profit Potential of the Industry
-Five forces helps to assess the long-run profit potential of an industry
-Take the perspective of the incumbent firm (the firm already in the industry)
-favorable/not favorable industry structure
Strategic groups
Clusters of firms within an industry that typically share:
-Breadth of product and geographic scope
-Price/quality
-Degree of vertical integration
-Type of distribution system
fast food is a strategic group within the restaurant industry
Industry structure can change over time as a result of...
-Innovation
-Technology changes
-Government policies
-Consumer preferences
What explains firm profitability?
-How structurally attractive is the industry?
-How well does a firm perform within its industry?
-How can a firm outperform the Industry Average?
-What does the stage of the Industry Life Cycle have to do with strategy? With profitability?
Competitive Advantage
if it achieves a higher profitability (e.g., Return on Assets) than the average in its industry
4 general ways that firms can obtain competitive advantage in mature markets with capable competitors
-Broad , Cost Leadership
-Broad, Differentiation
-Narrow, Cost Leadership
-Narrow, Differentiation
stuck in the middle
Firms that fail to choose a particular strategy
Cost Leadership and Differentiation
-only successful in creating Competitive Advantage if they achieve a greater Margin than the Average Firm in the Industry
Cost Leadership Strategy
-Invest in assets to lower operating expenses
-Deliver a product of OK quality at lowest possible cost
-If executed well, translates into above average profits with relatively low prices
-Goal = achieve significant cost gap over other competitors
BUT -Cost leaders must maintain proximity in quality/ often involves tradeoffs with product differentiation
Differentiation Strategy
-Offer products and services that are widely acknowledged as superior on at least one dimension
(e.g., durability, faster delivery, bundled services, greater variety, better image, easier to use, or overall higher quality)
-May be multiple dimensions of differentiation in an industry
-Selectively incur costs as necessary to create quality
Unsuccessful Differentiation happens when
-Achieving a premium price requires firms to incur costs that are more than the "boost" in price that the firm achieves.
-Firms differentiate in areas that are not important to buyers
Focus Strategy
helps firm achieve either cost or differentiation advantage
-Selects a narrow target segment with unusual needs
-product attributes and/or geographic location
-Configure the organization to serve only targeted segments
-sacrifice incremental business
-advantage lies in limited scope
Industry Life Cycle
refers to the stages of Introduction, Growth, Maturity and Decline that occur over the life of an Industry.
Introduction Phase
-Products unfamiliar to customers
-Market segments not well defined
-Product features not clearly specified
-Standards still being set in technology products
-Competition Limited
Introduction Phase Strategies
-Get early adopters to try product
-Generate exposure so product becomes the "standard"
Growth Phase
-Strong increase in sales
-Increase in competitors
-Branding is often key to success
Growth Phase Strategies
-Brand recognition
-Differentiated products
-Grow market share
Maturity Phase
-Demand slows
-Market becomes saturated
-Industry consolidation occurs
-Marginal players exit
-Direct competition intensifies
Maturity Phase Strategies
-Differentiation changes to a focus on price
-Efficient manufacturing to lower costs
Decline Phase
-Fall in Industry sales and profits
-Rivalry very intense
Decline Phase Strategies
-Maintain competitive position
-Harvest profits
-Exit the Industry
Most interesting area of the Industry life cycle
End of the Growth phase/beginning of Maturity
-This is where you see companies alter their strategies
-Companies often "get lost" strategically at this point (stuck in the middle)
2 classic trade-offs in strategic positioning
Source of advantage: low cost vs. differentiation
Scope of market: narrow vs. broad segment
Failing to make trade-offs will harm profits!
*choose among these based on:
own internal resources & distinctive competences*
Birger Wernerfelt
-Challenged Industry Structure as the only determinant of firm profitability
-Argued that if Industry Structure was the only determinant of firm profitability - then why don't all of the firms in an industry have the same profitability?
-must look at firm resources
resource
all assets, organizational processes, information and knowledge that is controlled by the firm that enable it to develop and implement value-added strategies
Two types of resources:
Tangible resources - easy to identify
Intangible resources - less easy to identify
Jay Barney
Proposed a framework for examining the importance of firm resources
VRIS (resource) Framework has four parts:
Is the resource:
-valuable
-Rare
-Difficult to imitate
-Difficult to substitute
IF ALL YES--> SUSTAINABLE COMPETITIVE ADVANTAGE
A firm can have a large resource endowment and still fail to have a sustainable competitive advantage IF...
It has not developed the capabilities to exploit those resources effectively
Organizational capabilities
-what the firm can do as a result of teams of resources working together
Ex. : customer service, product development capabilities, marketing capabilities
-what you can do with those resources
The basic principles of capabilities-based competition
-The building blocks of corporate strategy are not products and markets but business processes (note the similarity to intangible resources)
-Competitive success depends on transforming a company's key processes into strategic capabilities that consistently provide superior value to the customer
-Companies create these capabilities by making strategic investments in support infrastructure that links together and transcends traditional functions
Capability Configurations
Organizations can combine capabilities to produce even more valuable capability combinations
the most valuable capability that a firm can have
the ability to exploit organizational knowledge
Industry Structure is necessary but not sufficient to understand firm profitability because ....
Because there is variation in firms' profitability within industries
firm's resource endowments
-Resources can be tangible and intangible
-Intangible resources tend to more readily lead to competitive advantage
-VIRS framework can help assess which resources lead to competitive advantage
inimitable
When firms can combine their capabilities into capability configurations
Allows understanding on how the firm exploits its resource profiles
Exploring the firm's capabilities
Value
the amount a buyer is willing to pay for what a firm provides them
What is value chain measured by
total revenue
total revenue
which is a reflection of both the price of the firm's products and the quantity that the firm can sell
Key when analyzing the firms competitive position
Creating value for buyers that exceeds the cost of production (read margin)
Primary Activites
-Contribute to the physical creation of the product/service; its sale and transfer to the buyer and its post-sale service
-Inbound logistics
-Operations
-Outbound logistics
-Marketing and sales
-Services
Inbound logistics
Receiving, storing and distributing inputs to the product
Operations
All activities associated with transforming inputs into the final product
Outbound Logistics
Collecting, storing and distributing the product or service to buyers
Marketing and Sales
Activities associated with the purchases of products and services by end users and inducements to get them to make purchases
Service
All activities associated with providing service to enhance or maintain the value of the product
Support activities
Add value by themselves or add value through important relationships with primary activities and other support activities
-Firm infrastructure
-HR management
-Tech Developement
-Procurement
Procurement
Purchasing inputs used in the value chain
Technology Development
Research and Development
Human Resource Management
Activities involved in the recruiting, hiring training, development and compensation of employees
Firm Infrastructure
General Administration, General management, finance, accounting, legal, quality management, information systems
Typically supports the entire value chain, not just one activity
interrelationships among the activities within the firm
The more the firm can connect its activities, the greater its chances of obtaining enhanced profitability
Interrelationships among the activities within the firm AND with other organizations
The more the firm can connect its activities with activities in other firms, the greater its chances of obtaining enhanced profitability
Why no SWOT
-Static analysis
-Too hard to distinguish between weaknesses and threats and between strengths and opportunities
-Strengths may not led to a competitive advantage
-Many students think of opportunities as strategies (and they are not!)
Corporate level strategy
GIVEN THAT WE HAVE A PARTICULAR SET OF RESOURCES AND/OR CAPABILITIES, IN WHICH INDUSTRY SHOULD WE COMPETE?
horizontal integration
where a company buys things ONLY in the same field of the original thing they owned
-Delta Airlines buys JetBlue
-Coca cola buys vitamin water
Entrants<-- Rivals--> Substitutes
Strategy 1: Horizontal diversification
-Economies of Scope
-Economies of Scale
-Market Power
Economies of Scope
Leveraging core competencies
i.e., applying a core technology to multiple industries
Sharing activities
i.e., using one marketing department for many related products
Economies of Scale
Harness the volume produced to reduce costs
Market Power
Pooled negotiating power
i.e., selling ad space in your multiple media outlets
Strategy 2: Vertical Integration
when the firm moves beyond either end of the value chain to incorporate an activity typically outside the boundary of the firm.
i.e., auto manufacturer makes it own parts
i.e., oil company expands into gas stations
Verticle integration
where a firm becomes its own supplier or distributor.
Vertical Integration Benefits
-Secure supply of raw materials
-Protection and control of assets
-Access to new business opportunities
-Eliminates the need to manage multiple supply/distribution channels
Vertical integration risks
-Increased overhead and capital expenditure costs
-Loss of flexibility resulting in an inability to rapidly respond to changes in the environment
-Additional administrative costs
Strategy 3: Unrelated diversification
-Corporate Parenting
-Restructuring
-Portfolio Management

-Unrelated= no relationship
-Ex. Caviar buying a clothing store
Corporate Parenting
i.e., adding value to acquired businesses by performing activities such as accounting, and/or auditing
Restructuring
i.e., change firm strategy and operations so that a poorly performing firm is better positioned within their industry
Portfolio Management
i.e., Manage a set of businesses as one would manage a stock portfolio, so that the profitability, growth and cash flow characteristics would complement each other
Portfolio management continued
-One issue with unrelated diversification is determining in which businesses a corporate parent should invest, and which businesses should be either left alone, or divested.
Consulting firms devised a simple tool called ...... as a first step
Portfolio Management
Portfolio Matrix
Market Growth Rate vs Relative Market Share
One of the most heavily researched areas in Strategic Management
diversification
If a firm is in a structurally more attractive industry then...... led to higher performance (i.e., pharmaceuticals)
related diversification
If a firm is in a structurally less attractive industry and diversifies into a structurally more attractive industry, then ......... led to higher performance
unrelated diversification
How do firms diversify?
-Mergers & Acquisitions
-Strategic Alliances & Joint Ventures
Benefits of Mergers and Acquisitions
-Faster than building a business from the ground up
-Eliminates potential competition
-Means to gain valuable resources
Pitfalls of Mergers and Acquisitions
-Price can be VERY high
-Acquisitions can be imitated
-Potential negative organizational culture issues
Benefits of Strategic Alliances & Joint Ventures
-Enter new markets
-Reduce costs
-Develop/diffuse new technologies
Pitfalls of Strategic Alliances & Joint Ventures
-Finding proper partner is difficult
-Issues of trust loom large
-Human factors are difficult to manage
concentration strategy
firms that focus on only one product/market
;