MGMT 4513 Strategic Management - OKSTATE Prof. Frederico Aime - FINAL EXAM REVIEW

Strategic Management

The study of why some firms outperform others

Mission

- Statement explaining why a company exists

- Provides context for decisions within an organization

- Internal & external - no time frame.

- "Definition of who we are"

Goals/ Strategic Plan

- How to beat present and potential competitors

- Set of actions to provide products/ services that create more value than their cost

- Constantly changing - internal use.

Vision

- Crystallization of what leaders want the firm to be

- Guides development of strategy and organization

- Achievable within a time period

- Internal (except for slogans)

- Must match the mission

Stakeholders

Individuals and groups who can affect, and are affected by, the strategic outcomes achieved.

Stakeholders have...

Enforced claims on a firms performance.

Capital Market Stakeholders

Shareholders - major suppliers of capital (e.g. Banks)

Organizational Stakeholders

employees, managers, non-managers (people who work for the company)

Product Market Stakeholders

Primary customers, suppliers, host communities, unions

Economic Value Model

- Strategy objective is to maximize shareholder wealth

- Evaluate firms based on the shareholder perspective

Objectives other than wealth creation

Objectives used as surrogates for eventual wealth or the fulfillment of a mission

Stakeholder Surplus Model

Defines beneficiary group and maximizes wealth for total group (All stakeholders)

How do we know if a company is performing well?

- To replace assets a firm must earn return on capital in excess of cost of capital

- To survive acquisition, firm must achieve stock market value in excess of break-up value

Two approaches for evaluating a firms performance

- Financial ratio analysis

- Stakeholder perspective

General Environment

- Focused on the future

- Little ability to predict trends and events, less ability to control them, can vary across industries.

Industry Environment

- Industry defined

- Focused on factors and conditions influencing a firms profitability within and industry

Competitor Environment

Focused on predicting the dynamics of competitors' actions, responses and intentions

External Environments

- General

- Industry

- Competitor

Differentiation Strategy

Integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them

Product Differentiation

- Unique products

- Customer Loyalty

- Products at competitive prices

High product differentiation is usually accompanied by...

Decreased emphasis on competition based on price

Cost Leadership Strategy

An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors

Cost saving actions required by cost leadership strategy

- Efficient scale facility

- Tightly controlling production and overhead costs

- Simplifying production processes

- Monitoring costs of activities performed by outsiders

Cost Leadership Strategy traits

- Relatively standardized products

- Features acceptable to many customers

- Lowest competitive price

Threat of new entrants

Profits of established firms in the industry may be eroded by new competitors

High barriers of entry...

reduce the threat of new entrants

Economies of Scale

Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

Backward Integration

Occurs when a firm owns or controls the inputs it uses

Forward Integration

Occurs when a firm owns or controls the customers or distribution channels for its main products

Porters 5 Forces Model

Potential entrants - Threat of new entrants

Buyers - Bargaining power of buyers

Substitutes - Threat of substitute products/ services

Suppliers - Bargaining power of suppliers

Industry Competitors - Rivalry among firms

Threat of substitute products increases when...

- Buyers face few switching costs

- Substitutes products price is lower

- Substitutes product quality / performance are equal to or greater than existing product

Rivalry Among Competitors in an Industry

- Price competition

- Advertising battles

- Product introductions

- Increased customer service or warranties

Rivalry increases when...

- There are numerous or equally balanced competitors

- Industry growth slows or declines

- There are high fixed costs or high storage costs

- Lack of differentiation opportunities or low switching costs

- Strategic stakes are high

- High exit barriers prevent competitors from leaving the industry

Barriers of entry

- Economies of scale

- Product differentiation

- Capital requirements

- Switching costs

- Access to distribution channels

- Cost disadvantages independent of scale

- Government policy

- Expected retaliation

Buyers threaten an industry by...

- Forcing down prices

- Bargaining for higher quality or more services

- Playing competitors against each other

Unattractive industry traits

- Low entry barriers

- Suppliers and buyers have strong positions

- Strong threats from substitute products

- Intense rivalry among competitors

Attractive industry traits

- High entry barriers

- Suppliers and buyers have weak positions

- Few threats from substitute products

- Moderate rivalry among firms

Business Level Strategies

Intended to create differences between the firm's position relative to those of its rivals

Broad Scope

The firm competes in many customer segments

Narrow Scope

The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others

Generic Strategies

- Differentiation

- Overall cost leadership

- Focus

Differentiation Strategy traits

- Prestige or brand image

- Technology

- Innovation

- Features

- Customer service

- Dealer network

Potential Pitfalls of Differentiation Strategies

- Uniqueness that is not valuable

- Too much differentiation

- Too high a price premium

- Differentiation that is easily imitated

- Dilution of brand identification through product line extensions

- Perceptions of differentiation may vary between buyers and sellers

Focus Strategies

Integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment

Focus Strategy drivers

- Large firms may overlook small niches.

- Firms may lack resources to compete in the broader market.

- Niche firms may be able to better satisfy the specialized needs of a narrow market segment.

- Focus may allow the firm to direct resources to certain value chain activities that deliver a

competitive advantage.

Cost Leadership Strategy can frighten new entrants due to:

- Their need to enter on a large scale in order to be cost competitive

- The time it takes to move down the learning curve

Cost Leadership Strategy can mitigate buyers power by:

Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm

Cost Leadership Strategy can mitigate suppliers power by:

- Being able to absorb cost increases due to low cost position

- Being able to make large purchases, reducing chance of supplier using power

Differentiation Strategy can defend against new entrants because:

- New products must surpass proven products

- New products must be at least equal to performance of proven products, but offered at lower prices

Differentiation Strategy can mitigate suppliers power by:

- Absorbing price increases due to higher margins

- Passing along higher supplier prices because buyers are loyal to differentiated brand

Differentiation Strategy can mitigate buyers power because:

Well differentiated products reduce customer sensitivity to price increases

Differentiation Strategy is well positioned relative to substitutes because:

Brand loyalty to a differentiated products tends to reduce customers testing new products or switching brands

Differentiation Strategy defends against competitors because:

Brand loyalty to differentiated product offsets price competition

By studying the external environment, firms identify...

What they might choose to do

By studying the internal environment, firms determine...

What they can do

Internal Analysis

The process of examining an organization's strengths and weaknesses.

Internal Analysis components

- Resources

- Capabilities

- Core competencies

- 4 criteria pf sustainable advantages

- Value chain analysis

- Competitive advantage

- Strategic competitiveness

Sustainable Competitive Advantage

When competitors are unable to duplicate a company's value-creating strategy

4 Criteria of Sustainable Competitive Advantage

1. Valuable

2. Rare

3. Costly to imitate

4. Non-substitutable

Value Chain

Shows how a product moves from raw-material stage to the final customer

To be a source of Competitive Advantage, a resource or capability must allow the firm to:

- Perform an activity in a superior way to the way competitors perform it

or

- Perform a value-creating activity that competitors cannot complete

Corporate Level Strategies

Actions firms take to gain competitive advantages by selecting and managing a group of different businesses competing in several industries/ product markets

Corporate Level Strategy's Value

The degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under other ownership.

Strategic motives for Diversification

Motives that actually add value to diversification

Economies of Scope (related diversification)

- Sharing activities

- Tranferring core competencies

Market Power (related diversification)

- Blocking competitors through multipoint competition

- Vertical integration

Financial Economies (unrelated diversification)

- Efficient internal capital allocation

- Business restructuring

Diversification (other reasons)

- Low performance

- Uncertain future cash flows

- Risk reduction for firm

- Tangible resources

- Intangible resources

Managerial Motives for Diversification

- Diversifying managerial employment risk

- Increasing managerial compensation

High product differentiation is usually accompanied by...

Decreased emphasis on competition based on price

Related Diversification

Firm creates value by building upon/ extending its resources, capabilities, and core competencies

Cost savings that occur when a firm transfers capabilities and competencies developed in one of its business to another of its businesses

Economies of Scope

Value is created through economies of scope through:

- Operational relatedness in sharing activities

- Corporate relatedness in transferring skills or corporate core competencies among units

International Strategy

Strategy through which the firm sells its goods or services outside its domestic market

Global Strategy

Focuses on increasing profitability and growth by reaping the cost reductions that come from economies of scale, learning effects, and local economies

Global Strategy makes sense when:

- There are strong pressures for cost reductions

- Demands for local responsiveness are minimal

Multidomestic Strategy

Focuses on increasing profitability by customizing the firms goods or services so that they provide a good match to tastes and preferences in different international markets

Multidomestic strategy makes sense when...

- There are substantial differences across nations with regard to consumer tastes and preferences

- Where cost pressures are not too intense

Transnational Strategy

attempt to simultaneously achieve low costs through location economies, economies of scale, and learning effects while also differentiating product offerings across geographic markets to account for local differences and fostering multidirectional flows of skills between different subsidiaries in the firm's global network of operations

Transnational Strategy makes sense when:

- Cost pressures are intense

- Pressure for local responsiveness are intense

International Strategy makes sense when...

- There are low cost pressures

- Low pressures for local responsiveness

Corporate Governance is:

A relationship among stakeholders used to determine and control the strategic direction and performance of organizations

Corporate Governance is concerned with:

making strategic decisions more effectively

Corporate Governance is used to:

establish order between a firm's owners and its top-level managers whose interests may be in conflict

Governance Mechanisms: Large block shareholders have a strong incentive to monitor management closely because

- Their large stakes make it worth while to spend time, effort, and expenses to monitor closely

- May also hold board seats

Governance mechanisms