STRAT 302 MIDTERM

Strategy

the set of activities that a firm performs to win

firm

build and use resources to create, deliver, and monetize benefits to customers in market spaces. Need to win to get money from customers to meet financial obligations.

market space

consists of suppliers, customers, rivals, potential new entrants, substitutors and complementors

logic behind firm’s activities

1. implicit goal is to make money

2. money comes from customers

3. for customers to bring their money to you rather than take the money to your competitors you have to offer them benefits that they perceive as more valuable.

4. firm performs a series of activities to create products and services that embody benefits.

5. firm delivers these benefits to customers

6. firm must monetize customer benefits

Ryanair

excellent financial performance because of cost leadership strategy. no extra benefits on flights. fly to secondary airports, booked direct on website, standardized fleet, incentive based salaries, unbundled prices, ancillary revenues

ancillary revenue model

model focused on earning extra income from secondary goods, services, or add-ons that complement a company’s core. Ex. extra services (food, baggage, hotels/rental cars), and advertising on Ryanair

customers

have money so everything is considered relative to them

downstream

forward, towards customers

upstream

backward, away from customers

value chain

the sequence of value adding inter-linked activities that a firm performs in transforming inputs into a finished product or service that is marketed and distributed to customers

Apple

differentiation strategy, all products work in an ecosystem, licensing, app store, subscription services, premium prices for products, network effects, powerful branding.

Michael porter

Harvard professor who made contributions to generic strategy, value chain, and five forces

three strategies

cost leadership, differentiation, and focus

generic

any firms in any industry can use these strategies to outperform competition

customer reasons

1. products are lower cost than competitors

2. there is something distinctive about your products that customers perceive as more valuable to them than a competitor’s product

cost leadership

Set of activities that a firm performs to keep its costs so much lower than those of its competitors that it can pass on some of its cost savings to customers in form of low prices and still make money. Ryanair, SW, PC, Walmart, Meijer, McDonalds, Ikea

firm keeps its costs so much lower than those of competitors that it can compete on price.

differentiation

the set of activities that a firm performs to create benefits embodied in products or services that customers perceive as distinctly valuable to them compared to benefits from rivals and therefore are willing to pay premium prices for distinctiveness. Pepsi/Coke, Nike/Adidas, Boeing, Airbus, Lufthansa, Emirates, Apple, Tesla, BMW, Nespresso, Harley-Davidson, Rolls Royce

firms products are distinctive enough compared to competitors products to justify premium prices

focus

firm pursues a cost leadership or differentiation strategy in a niche market segment. narrowness can be defined by three scopes: geographic, product, demographic

firm uses a cost leadership or differentiation strategy to target a niche

tacit collusion

where both companies avoid price wars and overly aggressive moves that would hurt both. happens when the dominant competitors coexist and compete without destroying each other. compete fiercely in product innovation, marketing and branding. avoid destructive price wars and sustain market dominance while keeping out smaller rivals. Coke/Pepsi.

geographic scope

geographic area covered by a market segment

product scope

products addressing market segment

demographic scope

demographic segment of market

competitive advantage

a characteristic or combo of characteristics of the firm that enables them to out perform rivals. Can include strategy as well as resources and capabilities

horizontal integration

firm acquires or merges with competitors to create, deliver, and monetize benefits to customers.

advantages of horizontal integration

increased market share, economies of scale and scope, reduced competition and new market access

disadvantages of horizontal integration

regulatory scrutiny, cultural clashes, integration complexities and diseconomies of scale

vertical integration

a firm starts producing its own inputs (rather than buying them from suppliers) or disposing of its outputs (rather than having distributors)

advantages of vertical integration

produce better designs, protect IP, better control of suppliers or distribution activities to reduce costs and improve quality. Better access to timely info from customers and control of what is sent/sold to customers

forward vertical integration

when a firm bypasses distributors and sells outputs directly to end customers

backward vertical integration

when a firm makes its own inputs instead of buying them from suppliers

primary activities

activities that go directly into the creation of a product or the execution of a service. inbound logistics, operations, outbound logistics, marketing & sales, and after-sales services

inbound logistics

primary activity. activities related to receiving, warehousing and inventory management of source materials and components

operations

primary activity. activity related to turning raw materials and components into a finished product.

outbound logistics

primary activity. activities related to distribution, includes packaging, sorting, and shipping

marketing and sales

primary activity. activities related to the marketing and sales of a product or service including promotion, advertising and price strategy

after-sales service

primary activity. activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service.

secondary activities

help primary activities become more efficient, efficiently create a competitive advantage. omitted from value chain framework

procurement

secondary activity. activities related to sourcing of raw materials, components, equipment, and services.

tech development

secondary activity. activities related to R&D, including product design, market research and process development.

HR management

secondary activity. activities related to the recruitment, hiring, training, development, retention, and compensation

infrastructure

secondary activity. activities related to the firm’s overhead and management, including financing and planning

uber

differentiation, on-demand rides, heat maps for drivers, built in payment, multiple pricing categories, aggressive marketing and expansion, multi-sided platform, network effects.

multi-sided platform

a business that enables two or more groups of users that perform distinctly different functions to interact or transact directly with each other. creates value by facilitating interactions and network effects.

network effects

if more people use it, it becomes more valuable to each user, very often it is a competitive advantage

platform owner

creates value by facilitating interactions or transactions between the different sides

each side of user

creates value for the platform when it interacts with the other side.

growing network effects

can be done by subsidizing both sides to gain users, localness (target different geographic areas at a time) and maintaining equilibrium between sides.

competitive environment

includes rivals, new entrants, buyers, suppliers and substitutes

porter’s five forces

for extended competition. determines the impact on industry profitability. Rivalry among existing competitors, threat of potential new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes

rivalry among existing competitors

degree to which existing competitors in the industry compete for resources, product market positions and customer attention and money

determinants of rivalry

many competitors of similar size and power, when competition is based on price, slow industry growth, high exit barriers, highly committed players

threat of potential new entrants

the likelihood that new competitors can enter the industry and make money competing with existing competitors

determinants of new entrants

economies of scale, brand equity, switch costs of buyers, network effects, industry profitability, expected retaliation from incumbents

bargaining power of suppliers

the ability of suppliers to influence a firm’s cost, prices, and quality of available inputs

determinants of bargaining power of suppliers

suppliers are large and concentrated relative to a fragmented industry, firms in the industry need supplier more than suppliers need them, switching costs of suppliers are high, suppliers are differentiated, credible threat of forward integration, brand equity

bargaining power of buyers

the ability of buyers to exert influence over firms, getting their interests to be reflected in a firm’s decisions concerning customers

determinants of bargaining power of buyers

product differentiation, buyers switching cost is inconsequential to their own performance, buyer info availability and network effects.

threat of substitutes

degree to which products from the industry can be replaced by products from another industry that can perform the same function.

determinants of substitutes

price performance of products vs price performance of substitutes, buyers switching costs, product differentiation, and number of substitutes

high force

force reduces profitability of firms

medium force

force moderately reduces industry profitability

low force

force increase industry profitability

economies of scale

the more product that is produced, the cheaper the per unit cost of the product is

switching costs

the costs that a user or buyer incurs by switching from one product to another

complements

if two products need each other to be consumed, therefore if demand is increased for one, it increases for the other.

role of 5 forces

a tool to assess how to build and/or use resources to create, deliver, and monetize customers within an industry and competition

macro environment

PESTLE - political, economic, sociological, technological, legal and environmental influences in the competitors and firms environment

political

macro environment. how gov’t policies, political stability, tax, trade rules, and decisions affect businesses

economic

macro environment. how factors such as inflation, interest rates, unemployment, exchange rates and economic growth affect a firm

legal

macro environment. laws and regulations that a business must follow such as employment, consumer protection and safety

social

macro environment. changes in people’s lifestyles, demographic, attitudes, values, and consumer behavior

technological

macro environment. development of tech that can create opportunities or threats

environmental

macro environment. environmental and ecological factors like climate change, emissions, pollution, and sustainability

SWOT Analysis

strengths, weaknesses, opportunities and threats. strategy tool used to identify and access the internal and external factors that can impact a firm’s organization, project, product, individual, and even a country. used for planning purposes, may be performing well but room for improvement.

internal factors

strengths and weaknesses

strengths

internal factor. what you do well, look to see what you can reinforce, sustain, continue doing. ex. strong branding, cost leadership, differentiation (competitive advantage)

weaknesses

internal factor. what you lack or need to improve, that competitors may want to exploit. ex. bad rep, poor quality, poor profit

external factors

opportunities and threats

opportunities

favorable external factors that you can exploit. ex. tech innovation, changing consumer preferences, relaxing government regulations.

threats

external challenges that you want to mitigate. Ex. competition, tech innovation, changing consumer preferences, impending government regulations and expiring patents

uses of SWOT

personal career planning, launching a new product or business, assessing a company’s position in market, strategic planning

Amazon

cost leadership, network effects, 3rd party selling, multisided platform, fast delivery and prime, wide selection, AWS & cloud services, fremium model

factors of retail

location, shelf space, and inventory management

motivation for VRIO

to understand the key resources and capabilities that a firm uses to create, deliver and monetize benefits.

resources

the assets a firm owns or controls, a firm needs these to do well. four major types: human, physical, intellectual, financial

human resources

employees, managers, expertise

physical resources

factories, equipment, technology,

intellectual resources

brand rep, patents, trademarks, customer relationships, data, market knowledge, proprietary info

financial resources

cash, investments, access to credit

capabilities

firms ability to use and combine its resources efficiently to perform activities. Ex. to manufacture efficiently, to develop innovative products.

VRIO Framework

a strategic tool used to evaluate a firm’s resources and capabilities to determine whether they provide a competitive advantage. value, rarity, inimitability, and organization

valuable

if it makes a significant contribution to creating, delivering or monetizing benefits to customers. If no it’s a competitive disadvantage

competitive disadvantage

an unfavorable circumstance, flow, or higher cost structure that causes a business to underperform relative to its industry rival, when a resource/capability is invaluable

rare

if few firms possess this resource or capability. If no it is a competitive parity.

competitive parity

a company or product achieves averager or standard performance by matching industry norms, competitor pricing, or promotional spending rather than seeking market dominance. when a resource or capability is common

inimitable

it is difficult to imitate, if no the resource or capability is a temporary competitive advantage.

temporary competitive advantage

short term edge that lets a business beat its rivals before they copy the idea or catch up. if a resource or capability is imitable.

organized

to exploit a resource or capability through the right processes, policies and culture to realize the potential. If no it unexploited competitive advantage. If yes it is a sustained competitive advantage

unexploited competitive advantage

a unique strength, resource or capability that a business possesses but has not yet leveraged to gain a market edge because of lack of organization

sustained competitive advantage

a long term business strength that allows a company to consistently outperform rivals and maintain superior profitability. Facilitated by proper organization.