Strategic Management Test 1
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-A set of goal-directed actions
-Firm effects= 30%-45% (corporate parent, year effects, unexplained variance)
-How to build a sustainable competitive advantage in a discrete and identifiable market
-The overall plan for a diversified company
-What are the company’s distinctive competences and resources that can produce a competitive advantage?
-How can a firm position itself within the industry to create a sustainable competitive advantage?
-How sustainable is the competitive advantage?
What determines firm boundaries? Why do we have multi-business firms?
How do multi-business firms create or destroy value?
How should firms expand into new markets?
Which businesses to enter?
How to enter?
How to compete?
International Strategy is just like regular strategy, only International! (unique characteristics of entering and operating in foreign markets)
–> PESTEL provides an analysis to understand the general environment
–> Porter’s 5 forces help us to understand the task environment
-Political pressure on companies – BP’s Gulf of Mexico oil spill
-Interest Rates – affects incentives for capital expenditure, consumer spending
-Levels of Employment – affects availability of needed human capital (skilled or unskilled), consumer spending
-Price Stability – inflation (rising prices) related to higher interest rates, could be good or bad; deflation (lower prices) sounds good, may hurt demand and investment
-Exchange Rates – may hurt or help exports
-Demographic trends (16.4% of the total population are Hispanic)
Key assumption: The drivers of profitability across industries are the same.
This is bold! He is saying we can look at ANY industry, and this framework provides a method to understand the key levers that affect profitability
-Established Industry Rivalry
-If you are already in an industry, you want lots of barriers because they protect your profits. Otherwise, new competitors will enter and compete away your ∏.
-Network effects (Demand-side Economies of Scale)
-Customer Switching Costs
-Incumbency Advantages Independent of Size
-Unequal Access to Distribution Channels
-Restrictive Government Policy
-Set up a huge factory. With huge capacity, your fixed + operating costs / # units produced will be lower than rivals with a smaller factory
-This is a C driver (drives C down in ∏ = R – C)
-Supply side economies of scale imply that new entrants will be at a cost disadvantage relative to incumbents
-New entrants will have to enter with big investments in scale in order to compete on cost
-Number of users of a product go up –> increases a buyer’s willingness to pay for the product
-E.g.: ATM networks, cell phone providers, the internet, frequent flyer miles
-If a more extensive network possessed by incumbents increases willingness to pay, a new entrant will face a disadvantage during entry due to a smaller network
–>Chase has a huge ATM network in Columbus, OH. I like this because it doesn’t cost extra to use the ATM. If Bank of America enters the Columbus market, they may have to enter with 20 ATMs in order to compete. One BOA ATM is not that appealing to customers because of a smaller network, less convenience, more fees to use other ATMs.
-There are almost always some kinds of switching costs. Inconvenience and paperwork are both switching costs.
-Switching costs make it tough for a new competitor to break in to the market
–>Have to convince customers to switch by offering lower prices, discounts, good service, which lowers R and raises C
-Apartments and breaking leases.
-SAP: Companies that have paid tons to set it up and trained employees to use it are reluctant to switch to a competitor
-If entry is costly, the risk of entrants coming into the industry and competing with you is lower.
What are examples?
-Soda industry: You can make soda in a bathtub with water and sugar. Entry is cheap and easy.
-Liquefied Natural Gas: To start a new LNG facility, you need $500 million for a gasification facility, $1.5-2 billion for a liquefaction facility. Entry is VERY COSTLY.
-It’s where incumbents have higher R or lower C for reasons apart from size.
–>Starting a bar at French Quarter lots of foot traffic, high visibility, more business. If you open there, you preempt the location. Later entrants can’t get it. And it gives you an advantage.
–>Existing customers may naturally think of your product first
Fancy ice cream in Columbus: people think of Jenie’s ice cream first
–>Tough for new entrants.
–>Incumbents have been
learning how to improve
operations, lowering C
and raising R, over time
-I try to sell Hawk IPA. It’ll be tough. I have to convince distributers to carry my product. I have to convince bars to have a tap for my beer.
-Shelf space is big. Sellers may be tied up in long term contracts with other companies.
-The U.S. automotive industry
-This type of government regulation makes entry tough. But if you are an incumbent, you benefit from it because it limits competition.
-If companies are really dependent on suppliers, this high level of suppliers may hurt profitability in the industry
–>Microsoft squeezing profits from PC makers
-Supplier group does not depend heavily on the buyers
–>Landlord in NYC raising the rent
-Switching costs are high to change suppliers
–>Customized, highly engineered input
Suppliers threaten to integrate forward and compete!
–>Wal-Mart: They can demand whatever they want, and you will probably do it because they buy so much
-The industry’s products are undifferentiated
–>In a commodity industry, products are interchangeable
-Buyers face low switching costs
-Buyers can threaten to integrate backwards and become competitors
-Buyers are stronger if they are price sensitive
–>The input is a large amount of total cost structure; the buyers are strapped for cash; the quality of the product does not affect the buyer’s operations
–>A substitute performs the same or a similar function as an industry’s product by a different means
–>High threat of substitutes industry profits suffer
–>Substitute products or services limit the profit potential of an industry by placing a ceiling on prices
–>If an industry doesn’t distance itself from substitutes with product performance, marketing or other means, the industry will suffer low profits and growth
-Switching costs are low (generic drugs)
-The degree of rivalry depends on:
–>The intensity with which rivals compete
–>The basis on which rivals compete
-Rivalry can take many forms:
–>Price discounting, new product introduction, advertising campaigns, service improvements
-Competition along other dimensions other than price is less destructive because it can improve customer value and support higher prices
–>Product features, support service, delivery time, brand image
-Slow industry growth
-Exit barriers are high
-Fixed costs are high and marginal costs are low
-Capacity must be expanded in large increments to be efficient (resulting in long periods of overcapacity)
-The product is perishable
(2) Anticipating and exploiting shifts in the forces
(3) Shaping the balance of the forces to create a new industry structure that is more favorable to the company
-It’s a theoretical framework from IO economics that helps us explain differences in industry performance
-Basic view: industry structure affects how firms behave (note: same basic approach as Porter)
-The SCP model gives us some theoretical archetypes that are useful when comparing and analyzing industries
-Think of the SCP model as a theoretical continuum of industry structures ranging from more fragmented industries to more consolidated industries
-Whether the firm possess some degree of pricing power
-The type of product or service the industry offer (differentiated?)
-The height of entry barrier
-Consumers make decisions based mainly on price (identical products)
-Typically a low profit industry
-Firms have a hard time gaining a competitive advantage (parity only)
-It’s a theoretical state. Industries approach this.
-Firms are offering products with unique features
-Firms are able to carve out a niche, differentiate its product or service, and have a degree of “monopoly” control over pricing
-Firms try to emphasize its product differentiation (eg, advertising)
-Can be characterized by fierce rivalry between the big players, an interdependence of actions between the players (the actions of one firm influence the actions of the other), and possible coordination between firms (collusion is illegal, tacit “unspoken” coordination is not)
-Rivalry often along non-price competition (eg, services, features)
If you win Monopoly, you are the only firm left
-Governments sometimes grant the rights to be a sole supplier to incentivize a company to engage in the venture that might not be profitable otherwise
-Utilities (your power company, natural gas service)
Firms that have accrued big market power
–>Intel? (80% market share in semiconductors)
-A complementor = a company that provides a good or service that leads customers to value your firm’s offerings more when the two are combined
-Incumbents should encourage or cooperate with complementors
-Suggests the need to repeat your 5 forces analysis over and over to keep up with the evolution of the industry
–>Excessive M&A, leading to bigger firms with more market power (Chase, Citigroup; Accounting firms)
Identify emerging substitutes
–>Pdf for faxes, online conference services for business travel
Identify external shocks
–>Technological, regulatory: (internet and stock brokerages)
-Identify possible industry convergence
–>Former separate industries satisfy same customer need
–>Media markets (old-line media, print, online, TV)
Is Ikea’s success sustainable?
-They differ by important dimensions: R&D expenditures, technology, product differentiation, product and service offerings, pricing, distribution, customer service, et al.
-Can use generic strategies as a rough cut
-There often are significant performance differences across groups. Some groups are more profitable than others
–>The closer firms are to each other, the more intense the competition
-Strategic groups are affected differently by macro forces
–>Economic downturn hits low cost airlines differently than legacy carriers
-Strategic groups are affected differently by 5 forces
–>Barriers to entry, buyer power, threat of substitutes, etc. are higher for some groups than others.
–>Example: lower capital requirements to start a budget airline
-Some strategic groups are more profitable than others
–>Better to be a low cost airline (historically)
-So why not switch groups?
–>Mobility barrier: industry specific factors that separate one group from another
–>Think entry barriers. Think strategic fit and tradeoffs. Think generic strategies
–>If you are a low cost leader, can you also be a differentiator?
-The RBV and VRIO Framework
-Physical resources = machines, manufacturing facilities, and buildings
-Human resources = all of the experience, knowledge, judgment, risk taking propensity, and wisdom of individuals
-Organizational resources = the history, relationships, trust, and organizational culture, along with a firm’s formal reporting structure, explicit management control systems, and compensation policies
-$100 billion of intangible resources
-1) Question of Value
-2) Question of Rareness
-3) Question of Imitability
-4) Question of Organization
-Identify what the firm is good at (ie, lifting customer’s perceived benefits, or reducing production costs)
Amazon’s selection of items online, customer service
Honda’s engines are small but powerful and reliable
IKEA’s furniture design, low price, and experience
Tesla’s high-performance battery
Starbucks’s high-quality beverages and experience
-Valuable but common resources are a source of competitive parity
-To have better performance than competitors, you need to be unique!
-To gain competitive advantage, a firm needs to exploit resources and capabilities that are different from competitors
-Knowledge often diffuses over time, eroding the “rareness” of resources
You start a sports bar. But there are tons of them.
-This is about SUSTAINABILITY! If yes, firms with these abilities can have abnormally high profits for a long time
-If no, other firms will easily do what you are doing and compete away your profits
-Big question: Can firms imitate your skills?
-Important: evaluate the relevant barriers to imitation!
2) Substitution= Use some other resources instead
1) Importance of History
–>Historically unique circumstances may have played a part in creating the resources. You can’t replicate it –>Example: Caterpillar and WWII. Gov’t support.
Example: Honda took years and years to develop their engines and engineering ability. You can’t do this overnight.
2) Importance of Numerous Small Decisions (Casual Ambiguity)
3) Importance of socially complex resources
–>Interconnectedness: Accumulating increments in an existing resource may depend not only on the level of that resource, but also on the level of other resources
–> Examples: organizational phenomena like reputation, trust, friendship, teamwork, and culture. Very tough to replicate!
-You also need supporting complementary resources to gain a competitive advantage
-Complementary resources = resources that have limited ability to generate a competitive advantage in isolation, but in combination with other resources and capabilities, they enable a firm to realize its full competitive advantage
-Explicit management control systems
–>unique strengths, embedded deep within the firm, that allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost
-It’s basically the internal characteristics of the firm that makes the firm have a competitive advantage
-“They are built through the interplay of resources and capabilities”
-“Resources reinforce core competencies, while capabilities allow managers to orchestrate their core competencies.”
-Core Competences came about at around the same time as the RBV. (See Prahalad and Hamel 1990.) Very related concepts.
-The RBV VRIO framework is a little more precise, easier to apply.
-Primary Activities = firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain
–>Inbound logistics (supply chain management), operations, outbound logistics (distribution), marketing and sales, after-sales service
-Support Activities = activities that add value indirectly, but are necessary to sustain primary activities
–>R&D, information systems, HR, finance, accounting, general management
–>Use the RBV to test the firm’s resources and capabilities for each activity
-Use it to understand the firm as a system of interconnected activities
–>Strategic activity system = the conceptualization of the firm as a network of interconnected activities
–>A firm’s decisions for each activity are interconnected. They affect each other
–>To gain competitive advantage, all of the firm’s decisions at the activity level should work in concert. They should reinforce each other to execute a firm’s strategy.
–>Thus, there are tradeoffs. The firm must decide what to do for each activity and WHAT NOT TO DO. (Remember Porter said this?)
-Dynamic capabilities are an intangible resource built through continuous investments and experience over time.
Consider IBM as well as the bathtub metaphor
(2) tradeoffs arise from activities themselves
(3) limits to internal coordination and control
–>specifically a WIDER wedge than its competitors have achieved
Perform similar activities differently, or
Perform different activities than rivals
(2) Decrease C while V goes down less (ie, decrease production cost without a commensurate decrease in willingness to pay
-A Cost Leadership Strategy = reap large cost savings with only slight decreases in customer willingness to pay
-Focused Cost Leadership
Timex offers watches for many different segments of the mass market
-Understand the Cost Drivers in the industry
-Analyze a firm activity by activity (using the value chain) to
understand why a firm does or does not have a competitive advantage.
Spot opportunities to increase a firm’s competitive advantage
-Analyze strategic options
–>Lower cost materials, money, or labor
–>DeBeers and diamonds, Alcoa and Bauxite, GE Capital
-Economies of Scale
-Spread out fixed costs (market share!)
–>Microsoft upfront R&D for Windows 7, very low marginal cost
-Specialized equipment and systems, e.g., robots, software
Cube-square rule = volume increases more than surface area
-Constant returns to scale
-You’ve gotten too big. Why?
–>Complexity of management bureaucracy, hierarchy
–>Physical limits the building gets crowded!
-It’s about learning by doing
-The “steeper” the curve, the more learning
-With learning effect, you move down a given learning curve
-Better technology allows movement to a steeper curve
-Taken together, learning by doing allows a firm to lower its per unit costs by moving down a given learning curve, while leveraging experience based on economies of scale and learning allows the firm to leapfrog to a steeper learning curve, further driving down per unit costs
There’s inconsistencies in combining the two. The set of activities for one conflicts with the set of activities for the other.
It’s called an Integration Strategy. Any examples?
Has to be a very special firm. Needs to resolve the inconsistencies
-Economies of Scope – lower C and/or higher V that come from producing two (or more) outputs at less cost per unit than producing each output individually
-Innovation – better production process or product can resolve tradeoffs
-Structure, Culture and Routines – unique management systems that lower C and push up V
-Different divisions might pursue different strategic positions
-Does this work? Would Porter still disapprove?
–>Tata bought Jaguar and Land Rover in 2008. It then creates the Nano (the world’s cheapest car) in 2009
–>Ford and Lincoln: Would you buy a Lincoln? They just revamped, creating a separate division called the “Lincoln Motor Company”. Will this help?
–>Hyundai has the Genesis and the Equus under the Hyundai badge. Good idea?
-Need to constantly look for adjustments to enhance the wedge, adjust activities in response to external dynamics
–>Ebay selling skype, discontinued selling new goods
-Need to try to reach the productivity frontier = captures the best practices at a given point in time
–>Curve captures the tradeoffs between value and cost
–>You want to be on the frontier, and your location captures your desired strategic position
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