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Strategy & Policy: Exam 2

Terms in this set (66)

"Generic" strategies
Relating to or descriptive of an entire group or class; general
Low cost leadership
Achieving lower COSTS than competitors (not lowering prices); not necessarily with the lowest prices (but this is often the case); Ex. Walmart
Differentiation
Getting buyers to pay a premium (increase revenue) for products/services; customer perception of value is required
Types of generic strategies
Low cost leadership & differentiation
Green light generic strategy mix
Lower revenue, lower costs
High cost leadership, low differentiation
Ex. Walmart, Kia

OR

Higher revenue, higher costs
Low cost leadership, high differentiation
Ex. Tiffany, Porsche
Red light generic strategy mix
Lower revenue, higher costs
Low cost leadership, low differentiation
Ex. Sears, Chrysler
Bright light generic strategy mix
Higher revenue, lower costs
High cost leadership, high differentiation
Ex. Disney
Yellow light generic strategy mix
Moderate revenue, moderate cost
Center of cost leadership and differentiation matrix
Ex. Target, GM
Low cost leadership strategies
Economies of scale
Economies of scope
Low cost supplies
Low cost distribution
Cost-saving technologies
Lean operations
Low cost through economies of scale
As volume of production increases, per unit costs decreases, but only to a point (diseconomies of scale)
Low cost through economies of scope
As volume of production increases across multiple business units, per unit costs decrease, but only to a point (diseconomies of scope)
Low cost leadership through low cost supplies
Lower supply costs than competitors
-closer to suppliers
-lower negotiated prices with suppliers
-more efficient receiving, storage, warehousing, etc.
-different supplies/suppliers (Ex. Oakland A's players)
Low cost leadership through low cost distribution
Lower shipping/delivery costs than competitors
-closer to customers, especially for goods that are expensive to ship
-lower negotiated costs with shipping companies
-more efficient shipping operations/packaging, etc.
-different distribution channels (Ex. Internet shipping vs. big box retail, DollarShave razors)
Low cost leadership through cost-saving technologies
Machines are typically much less expensive than people
-Jobs replaced by technology
Low cost leadership through lean operations
Marketing
-warranties, customer service, reliance on word of mouth advertising, product development, etc.
Management
-salaries, training, benefits, etc.
Finance
-borrowing costs, hedges, Southwest Airlines locking in fuel prices, etc.
Operations
-inventory, IT investment, facilities, quality, etc.
Differentiation strategies
Raise performance
-reliability, durability, safety, convenience, ease of use, customer service
Provide intangibles
-prestige, image, fun, social causes, appearance, emotions, etc.
Lower buyers' costs (without lowering prices)
-inventory, installation/assembly, maintenance/repair, operational, replacement
Advantages of low cost leadership
-Best position to compete on price
-Scale, scope, experience, etc. can be significant entry barriers
-Can more easily absorb supplier price increases
-Substitute price must be lower to be viable
Disadvantages of low cost leadership
-Strategic tunnel vision (price cuts when not necessary, pass up other good strategies)
-Cost advantages not sustainable (changes in customers, tech, etc.)
-May create inefficiencies (Ex. diseconomies of scale)
-Buyers may become less price sensitive (Ex. economic recovery/growth)
-Heavy investments may be required (capital, opportunity costs)
Advantages of differentiation
-Specialty niches created with fewer/no competitors
-Acquiring customers difficult for new firms (brand loyalty)
-Easier to pass along supplier price increases to buyers
-Buyers lack alternatives and willing to pay more
-Substitute performance level must be higher to be viable
Disadvantages of differentiation
-Buyers must perceive the benefits (razors)
-Extensive market/customer education may be necessary
-Confused customers (Tide; in over-differentiated markets)
-Differentiation may be imitable
-Buyers may become more price sensitive (Ex. recession)
-Product development costs higher
Vertical integration strategies
Backward (upstream) integration & forward (downstream) integration
Backward (upstream) vertical integration
Extending the firm's activity into supply sources; can buy suppliers or start own operations; Ex. Tesla making its own batteries
Forward (downstream) vertical integration
Extending the firm's activity into buyers; distributors, retailers, manufacturers; can purchase existing firms or start own operations; Ex. sunglasses manufacturer buying retail stores, McDonald's buying out franchises
Motivation for vertical integration
-Combined physical operations (lower handling, transportation costs; lower number of steps in production process)
-Internal control & coordination (scheduling, inventory, natural disasters and emergencies, etc.)
-Better information (product adaptation/specialization)
-Avoiding the market (no price shopping, negotiating, etc.)
-Substantial entry barriers (more expertise, knowledge, money, etc. to compete)
Horizontal integration strategies
Expanding the firm's activities at the same point in the supply chain; through expansion (geographic, adding customer contact points (retail, delivery, Internet, etc) or through acquisition (of direct competitors or similar companies in other areas; Ex. Luxottica and Persol, RayBan, & Oakley)
Motivation for horizontal integration
-Increase firm size (economies of scale, prestige & power)
-Increased market share (lower rivalry, important in mature industries like power-tools (Ex. Stanley & Black&Decker), can eliminate competition in smaller markets, may be blocked at the national level)
-Access to new/different markets (Ex. Bass Pro Shops & Cabela's)
-Access to information/skills/technology (Ex. Pfizer (small-molecule drugs/pills) purchase of Wyeth (biologics/injections))
Related (Concentric) diversification
Expanding the firm's activities outside the industry, but to a related industry (complementary, synergistic areas (operational, knowledge, or other); through expansion or acquisition; Ex. lawn mowing and fertilizer or landscaping, mini-golf adding restaurant for entertainment
Motivation for related (concentric diversification)
-Economies of scope (Ex. Amazon)
-Access to new/different markets/customers (Ex. Facebook, WhatsApp)
-Overcoming entry barriers (Ex. Cisco)
-Some increased diversity - lower risk (eBay & PayPal)
Unrelated (Conglomerate) Diversification
Expanding the firm's activities outside the industry and into an unrelated industry; no real synergies exist operationally, primary motivation is financial returns; through expansion or acquisition; Ex. lawn mowing and daycare, mini-golf and batting cages across town)
Motivation for unrelated (conglomerate) diversification
-Significant reduction in risk (Ex. GE, Berkshire Hathaway)
-Profit from purchase of undervalued or troubled assets
Motivation for cooperative & international strategies
-Shared expenses/costs/risks
-Shared knowledge/experience
-Shared assets (Ex. facilities)
Challenges of cooperative & international strategies
-Shared revenues/profits
-Cheating/freeloading partners
-Control
Collusion
Rivalry between competitors reduced in different ways and on different levels
Methods of collusion
-Pricing promotions, and other marketing moves
-Turf protection (product, geography)
-Operations (Ex. capacity, employees, etc.)
Types of collusion
-Tacit (implicit, implied) collusion (a general understanding that rivalry between competitors is reduced; Ex. asynchronous soft drink bottlers promotions)
-Overt (explicit, stated) collusion (an informal agreement that is reached to reduce competition; Ex. Apple, Google, Pixar, Intel, & other tech firms had "no cold call" agreements in the recruiting/poaching of employees, golf course agreement)
-Cartel (organized) (a formal agreement is reached to reduce competition; Ex. LG, Samsung, & 4 Taiwanese companies met in hotel companies for five years)
Types of cooperative strategies
-Licensing/franchising
-Strategic alliances
-Joint ventures
Licensing/franchising
One firm gives the other the right to produce and/or distribute products/services; in exchange for a royal licensing fee, or franchising fee; contract stipulates conditions (not just a sales/distribution agreement); Ex. fast food franchises, brand names to Luxottica)
Strategic alliances
-Vertical (Ex. Dell partnership with monitor supplier Sony)
-Horizontal (Ex. Airline code share agreements between AA & BA, Quantas, etc.)
-Complementary (Ex. Cisco Networking Academy)
Joint ventures
A standalone organization crafted and jointly owned by two or more parent companies; Ex. SABMiller+MoisonCoors=MillerCoors, NBC+abc+FOX=Hulu, fuel cell from GM+Honda, Toyota+BMW, Ford+Nissan+Mercedes-Benz; Greenfield ventures
Greenfield ventures
New, wholly owned subsidiary is created; firm has complete control; the firm starts from scratch ("There was a green field over there, now there's a manufacturing plant"); Ex. Toyota opening truck manufacturing plant in San Antonio
Order of timing & control ladder (Less time & control ---> more time & control)
Importing/Exporting --> Strategic Alliances --> Licensing/Franchising --> Joint Ventures --> Acquisitions --> Greenfield Ventures
First mover
To a geographic market, product, service, technology, etc.
Successful first movers
Walmart, Amazon, Ford
Failed/struggling first movers
Kane Kramer (iPod designer), Atari, Xerox
Successful late movers
Microsoft, Vizio (copied Sony), Chevrolet
First mover makes sense if:
-Imitability is low (most important; patents, scarce supply/distribution channels, prime location, etc.)
-Image/reputation are important to customers (and being first is an important way to boost image/reputation; Ex. jewelers, luxury brands, universities)
-The learning curve benefits are very important to cost cutting (Ex. Amazon; becoming less important with technology)
-Customer switching costs are high (Ex. cell phones, online banking, office software)
First mover does NOT make sense if:
-Early competition and market segmentation different now than in the future (due to environmental/customer shifts; skills needed for launch (entrepreneurship, engineering) not skills needed for growth (Ex. economies of scale)
-Cost of opening the market are great (Ex. electric cars; customer education (use, service, etc, creep mode), regulatory hurdles (new regs to lobby for/against, Ex. mileage ratings), research & development (labs, testing, prototypes, etc.), infrastructure support (home outlets, battery charging stations, etc.)
-Later competition will be formidable (Ex. attracting industry giants with access to significant capital, scale economies, and R&D talent)
-Technological change will make early investments obsolete (customers want the latest & greatest rather than tried & true, Ex. HD TV)
Stability strategy
No major changes; decision to keep the current strategy but can still make improvements; often the case in small businesses
Advantages of stability strategy
-High level of expertise (operations, suppliers, buyers, competitors, regulators, etc.
-Cash available to fund existing initiatives (underfunded activities aren't as much)
-Not extending to unfamiliar areas (avoiding rookie mistakes, Ex. Goodyear)
Disadvantages of stability strategy
-Lower diversification (higher risk)
-Lower prestige
-Lower levels of environmental adaptation
Downsizing
Restructuring strategy that reduces the number of employees, divisions, units, etc.; Ex. GM reduced to 4 brands, closed factories, laid off management
Divesture
Restructuring strategy of selling a business unit to:
-Another company (public or private), Ex. Pringles (P&G) to Kellogg
-Shareholders (P&G Duracell) or an IPO (PE firms selling companies)
-Employees or management (leverage buyout/LBO; Ex. Long John Silver's & A&W to franchisees)
New capital infusion
-Angel investors, venture capitalist (Ex. Facebook); primarily for smaller/start-up businesses; existing management often remains in control but right to profits is further diluted
-Private equity, hedge funds (Ex. Burger King, Toys R Us); existing management is often augmented or replaced; sometimes stock is no longer available publicly
Tactics examples
Common actions used to execute strategies
-Encirclement (Little Big Horn)
-Frontal assault
-Flanking maneuver
-Guerilla warfare
-Bypass attack
-Blitzscaling
Encirclement (Little Big Horn)
Surround and overwhelm the competition; success requires diversification and size; Ex. Facebook & Baylor's social networking site
Frontal assault
Attack head-on; success requires superior resources; Ex. Coke vs. Pepsi stalemate
Flanking maneuver
Attacking from the side or from behind; success requires patience and accurate assessment of competitors; Ex. Toyota's penetration of US market
Guerilla warfare
Small, intermittent, assaults; requires restraint (Ex. don't wake sleeping giants); Ex. Mom & Pop shop vs. big box retailers, small office store vs. OfficeMax
Bypass attack
Change the rules of the game or play a different game; success requires innovation (inimitable); Ex. Groupon
Blitzscaling
Grow very, very quickly; first to scale or establish extensive networks; success requires above average risk taking, intense focus, partners with capital, and ability to bear inefficiencies; Ex. LinkedIn, PayPal, Google
Strategy traps examples
Failure to focus on fundamentals/core competence
-Follow the leader
-Hit another home run
-Arms race
-Do everything
-Losing hand
Follow the leader
Blindly following another firm that may be wrong; using strategies designed for another firm's SWOT; Ex. Circuit City vs. BestBuy salespeople compensation model
Hit another home run
Addicted to the windfall of a "super product", expanding budgets; unrealistic expectations looking for a quick fix instead of long, hard work; Ex. Crocs, movies studios
Arms race
Using market share (or similar) as the primary metric of success; drives up firm costs in short runs; drives down all firms profits; in the long run; Ex. Blockbuster, Hollywood Video
Do everything
No focus; multiple strategies implemented; shotgun approach; mediocrity at best; little to no expertise or excellence; Ex. Sears
Losing hand
"Good money after bad"; escalation of commitment; "That's the way we've always done it"; Ex. Kodak)
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