Bus Policy & Strategy Ch 1-4

Why do firms use the Strategic Management Process?

to achieve strategic competitiveness and earn above-average returns

Above-average returns

in excess of what investors expect to earn from other investments with similar levels of risk

Strategic Competitiveness

when a firm successfully formulates and implements a value-creating strategy

Competitive Advantage

a strategy that creates superior value for customers AND that it’s competitors are unable to duplicate

Models of Strategic Decision Making (used to develop Vision, Mission, and Values)

I/O Model

Resource-Based Model

I/O Model

• the firm’s external environment has the largest influence on the choice of strategies vs its internal resources, capabilities, and competencies

• earn above-average returns by locating an attractive industry

Resource-Based Model

• the firm’s unique resources, capabilities, and core competencies have the largest influence on the choice of strategy vs the external environment

• earn above-average returns by using the firm’s valuable, rare, costly-to-imitate, and non-substitutable resources and capabilities effectively

Assumptions of the I/O Model

• external environment imposes pressures and constraints that determine strategies

• firms competing within an industry assumed to control similar resources and pursue similar strategies

• resources are highly mobile, resource differences between firms will be short-lived

• decision makers are rational, profit-maximizing, and have the firm’s best interests in mind

Five Forces Model of Competition

describes industry characteristics

an industry’s profitability is a function of interactions among

• power of suppliers

• power of buyers

• competitive rivalry in industry

• product substitutes

• potential entrants to the industry

Assumptions of Resource-Based Model

• firm’s internal resources and capabilities determine strategy

• develops unique capabilities based on how they combine/use resources

• resources and some capabilities are not highly mobile across firms

• differences in resources and capabilities are the basis of competitive advantage rather than it’s industry’s characteristics

Vision

a picture of what the firm wants to be, what it wants to achieve

Mission

specifies the business in which the firm intends to compete and the customers it intends to serve

• more concrete than a vision

• should establish a firm’s individuality

• inspiring and relevant to all stakeholders

Value

the purpose of the firm and how it will conduct business

Stakeholders

individuals, groups, and organizations that can influence and are affected by the outcomes of a firm

• internal - firm’s employees

• external - suppliers, customers, unions

Primary Stakeholders

directly involved in the value-creating process of the firm

Secondary Stakeholders

influence and are influenced by what the firm does, but does not directly contribute to the value the firm creates

Parts of the External Environment

General Environment

Industry Environment

Competitor Environment

General Environment

segments and elements in the broader society that affect industries and the firms competing in them

• 7 segments: demographic, economic, political/legal, sociocultural, technological, global, and sustainable physical

Industry Environment

factors that influence a firm, it’s competitive actions and responses, and the industry’s profitability potential

• the five forces model of competition — try to influence the forces in its favor

Competitor Environment

the firm analyzes each major competitor’s future objectives, current strategies, assumptions, and capabilities

Parts of the External Environmental Analysis Process

Scanning

Monitoring

Forecasting

Assessing

Threat of New Entry Considerations

Barriers to Entry

Expected Retaliation

Barriers to Entry

Economies of Scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages independent of scale

Government policy

Low Profit Potential

• low entry barriers

• suppliers and buyers have strong positions

• strong threats from substitutes

• intense rivalry among competitors

High Profit Potential

• high entry barriers

• suppliers and buyers have weak positions

• few threats from substitutes

• moderate rivalry among competitors

Opportunity

a condition in the general environment, that if exploited effectively, helps a company reach strategic competitiveness

Threat

a condition in the general environment that may hinder a firm’s efforts to achieve strategic competitiveness

External environments tend to be

turbulent, complex, uncertain, and ambiguous

1 Scanning

identifying early signals of environmental changes and trends

2 Monitoring

detecting meaning through ongoing observations of environmental changes and trends

3 Forecasting

developing projections of anticipated outcomes based on monitored changes and trends

4 Assessing

determining the timing and importance of environmental changes and trends for firms’ strategies and their management

Competitor Intelligence

the set of data, information, and knowledge that allows the firm to better understand it’s competitors objectives, current strategy, assumptions, and strengths and weaknesses

Competitive advantages are NOT

permanently sustainable, so firms must exploit it now while forming new advantages

Tangible and Intangible Resources

tangible - assets that can be observed and quantified

intangible - assets rooted in firm’s history, accumulate over time and hard to imitate — the most valuable in the creation of capabilities

Tangible + Intangible Resources =

capabilities, used to complete the organizational tasks required to produce, distribute, and service consumers

• composed of the unique skills and knowledge of the firm’s employees

Core Competencies

capabilities that serve as a source of competitive advantage

• valuable, rare, costly-to-imitate, and non-substitutable

• emerge over time

Outsourcing

purchase of a value-creating activity from an external supplier

Foundations of Competitive Advantages

Resources

Capabilities

Core Capabilities

Resources

represent inputs (equipment, brand name, employees skills) into a firm’s production process

• the source of a firm’s capabilities

• covers a spectrum of individual, social, and organizational phenomena

• alone, do not yield a competitive advantage

How many core competencies are required for a competitive advantage?

3 or 4

Tools that help firm’s identify their core competencies

The 4 criteria of sustainable competitive advantage

Value chain analysis

Sustainability of a competitive advantage is a function of the

• rate of core competence obsolescence because of environmental changes

• availability of substitutes for the core competence

• imitability of the core competence

Valuable Capabilities

help a firm neutralize threats or exploit opportunities

Rare capabilittes

are not possessed by many others

Costly-to-Imitate capabilities

• Unique Historical Conditions — valuable culture or brand name

• Ambiguous cause — causes and uses of a competence are unclear

• Social complexity — interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Non-Substitutable Capabilities

no strategic equivalent — firm specific knowledge, organizational culture, superior execution of the chosen business model

Benefits of Outsourcing

• a firm can concentrate on areas in which it can create value

• speciality suppliers can perform outsourced activities more efficiently

Outsourcing DO NOTS

• Do not outsource activities in which the firm itself can create and capture value

• Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks

• Do not outsource capabilities critical to the firm’s success

• Do not outsource activities that stimulate the development of new capabilities and competencies

Business-level Strategy

integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Five Business-level Strategies

Cost leadership — perform activities efficiently

Differentiation — perform distinctive activities

Focused cost leadership

Focused differentiation

Integrated cost leadership/differentiation

When considering customers, a firm examines

who will be served

what needs of customers will be met

and how will they satisfy customer needs

Customers

the foundation of a successful business level strategy

Firm’s relationships with customers are characterized by three dimensions

Reach

Richness

Affiliation

Reach

• deals with the # of users

• need to think about accessing and connecting with customers

• critical for social networking firms

Richness

deals with maintaining information with depth and detail for (and from) customers

• Internet and e-commerce transactions are helpful

Affiliation

deals with facilitating useful interactions with customer, goal is to view the world through customer’s eyes

Broad Scope

firm competes in many customer segments

Narrow Scope

a segment or group of segments in the industry and tailors its strategy to serve them

lower cost + broad market =

cost leadership

distinctiveness + broad market =

differentiation

lowest cost + narrow market segment(s) =

focused cost leadership

distinctiveness + narrow market segment(s) =

focused differentiation

When a firm implements a strategy that creates superior value for customers, companies will typically be able to maintain their competitive advantage indefinitely

false

In order to gain information about its competitor, XYZ Corp, Alpha Company obtained XYS’s annual reports for the last five years. This action is unethical and possibly illegal.

false