Strategic Management ch.1-6

business level strategy

goal directed actions

• to achieve competitive advantage in single product market

strategic position

a strategic profile based on value creation and cost in a specific product market

a unique and valuable strategic position…

• meets customer needs

• maximizes product value

• is lowest possible product cost

strategic trade offs

choose between a cost or a value position

• tension between value creation and pressure to keep cost in check

differentiation strategy

higher value, higher prices, unique features

cost leadership

similar value with competitors, charging lower prices

economies of scale goal

decrease in cost per unit

economies of scope

savings that come from producing two outputs at less cost

three drivers that increase perceived value

1. product features

2. customer service

3. complements

how can a cost leader create competitive advantage

V-C > EV, must be better than competitors

drivers that keep costs low

• input factors: raw materials, labor

• economies of scale: decrease in cost per unit as output increases

• learning curve effect: less time to produce output because of experience

• experience curve effect: improvements to processes over time

diseconomies of scale

inflexible, firm is too big, complexities of too much coordination

economies of scale properties

specialized employees, taking advantage of certain properties, move down the learning curve

successful business strategy includes

• leveraging internal strengths

• mitigate internal weaknesses

• exploit external opportunities

• avoid external threats

Blue Ocean Strategy

combines both differentiation and cost leadership activities

innovate to reconcile trade-offs

represent untapped market spaces

• Trader Joes

to achieve value innovation

lower costs

increase perceived consumer benefits

standard performance dimensions

1. what is firms accounting profitability

2. how much shareholder value is created

3. how much economic value is created

accounting profitability

compares and benchmarks firms performance to other competitors or benchmarks

limitations of accounting data

historical and back wards looking

• does not consider off balance sheet items

• focuses mainly on tangible assets

shareholder

owns shares of stock, legal owners of company

risk capital

money provided for an equity share

• if firm goes bankrupt, you will not get money back

total return to shareholders equation

stock price appreciation + dividends

market capitalization

dollar value of shares outstanding

• number of shares outstanding X share price

limitations of stockholder value creation

• stock prices can be volatile

• macroeconomic factors affect stock prices

• stock prices may reflect the mood of investors

economic value creation equation

Value - Cost

• buyers willingness to pay for a product at the firms total cost to produce it

consumer surplus equation

value - price

firm profit equation

profit - cost

opportunity costs

value of the best forgone alternative

limitations of economic value creation

• valuing a good is not easy

• value depends on the consumer and their preferences

the balanced scorecard

process of looking at various metrics and tying those together with the goals of the company to gain competitive advantage

• using internal and external measures

metrics for balance scorecard

• customers

• value creation

• core competencies

• shareholders

advantages of balanced scorecard

• turns visions into goals

• designs plans

• alerts needs of change

disadvantages of balanced scorecard

• focused on implementation

• hard to find solution

• lacks guidance

triple bottom line

focus on 3 things

1. profits: economic dimension

2. people: social dimension

3. plant: ecological dimension

main goal of triple bottom line

to equally treat all 3 factors

• pay people the right amount

• help the planet

• make money

core competencies

unique strengths embedded deep within a firm that allows them to differentiate from rivals

core competencies result in

higher value for customers OR services offered at a lower cost

resources

any assets that firms can draw on when crafting strategy

capabilities

skills that employees have

activities

combining resources and capabilities to create processes

resource based view

model helps identify core competencies

2 different types of resources

1. tangible: physical attributes and are visible

2. intangible: no physical attributes and invisible

2 critical assumptions of the resource based view

1. resource heterogeneity

2. resource immobility

1. resource heterogeneity

a firm is a unique bundle of resources, capabilities, and competencies.

• bundles differ across firms

2. resource immobility

resources are unique to firms, difficult to replicate, and can last for a long time

VRIO Framework

a tool for evaluating firm resource endowments (donations)

to be the basis of competitive advantage, a resource must be

• Valuable

• Rare

• costly to Imitate

• Organized to capture value

VRIO process

1. is resource valuable

2. is resource rare

3. is resource costly to imitate (if not, there is temporary competitive advantage)

4. is resource organized to capture value

all answers should be yes to get sustainable competitive advantage

a resource is valuable if

it helps exploit an opportunity

a resource is rare if

only a few firms possess it

a resource is costly to imitate if

competitors cannot develop or buy the resource at a reasonable price

a resource is organized to capture value if

there are effective internal organizational structure within the firm

isolating mechanisms

help sustain a firms competitive advantage by preventing rivals from competing away the firms advantages

• barriers to imitation (intellectual property protection or social complexity)

core rigidity

a former core competency that is turned into a liability caused by the PESTEL factors

• it is a result of environmental change

dynamic capabilities

a firms ability to adapt their resources overtime to create…

• competitive advantage

• create a strategic fit within the industry

resource stocks

firms current level of intangible resources

resource flows

firms level of investments to maintain or build a resource

firm value chain

internal activities a firm engages in when transforming inputs to outputs

• each activity adds incremental value as well as incremental costs

PESTEL

groups environmental factors into 6 segments

• straightforward way to scan, monitor, and evaluate external factors

PESTEL segments

P- political

E- economic

S- sociocultural

T- technological

E- ecological

L- legal

External Factors and their impact on firms

General Enviro:

• leaders have little control

• macroeconomic factors included

Task Enviro:

• strategic leaders have some influence

• includes comp. of groups and structure of industry

P-political

pressure that government bodies, nongovernmental organizations and social movements can exert to influence a firm

• lobbying and PR

E-economic

largely macroeconomic and affect the whole economy

• growth and employment rates

S-sociocultural

culture, norms, and values are in flux. They differ and leaders should monitor these trends.

• age, gender, family size, religion etc.

T-technological

application of knowledge to create new products

• one of the most impactful factors

• new process technology and products

• six sigma, drones, wearable devices

E-ecological

broad environmental issues

• climate change

relationships between organizations and environment can be adversarial

L-legal

official outcomes of political processes

often coexist with political

• laws, mandates, regulations

industry effects

describes the economic structure of the industry

• look at things that are common to all firms in one industry

firm effects

attribute firm performance to strategic leaders and more important than industry effects.

• looking just at one firm

industry

• same set of suppliers and buyers

• similar products/ services

industry analysis

a method to identify an industry’s profit potential and derive implications for a firm’s strategic position

strategic positioning

a firms ability to create value (V) for customers while containing costs (C).

• goal is to create a large gap: V-C

five forces model

helps strategic leaders understand

1. profit potential of different industries

2. how they can position their firms to gain competitive advantage

5 forces named

1. threat of entry

2. power of suppliers

3. power of buyers

4. threat of substitutes

5. rivalry among competitors

1. threat of entry

the risk that potential competitors will enter the industry

• the harder it is to enter, the higher your potential profitability

entry barriers are: network effects, capital requirements, policy and mandates

2. power of suppliers

pressure that industry suppliers can exert on the industry’s profit potential

• less suppliers in industry= they have more power

3. power of buyers

about industry customers, not individual customers (company buying from supplier)

• Walmart is an industry customer, can make decisions that hurt other companies

• the stronger a company and the more suppliers there are, the more options the company has

4. threat of substitutes

meet the same basic customer need in a different way and outside of the given industry

• gas vs. biofuel

• energy drinks vs. coffee

5. rivalry among comeptitors

The intensity with which companies in the same industry jockey for market share and profitability

• nice - cut throat

• the stronger the forces, the stronger the competitive rivalry

competitive industry structure =

• number/ size of competitors

• firm purchasing power

• type of commodity

• height of entry barriers

perfect competition

a lot of competitors, generally smaller firms, hyper competitive market, low entry barriers

• restaurant industry

monopolistic competition

a lot of firms, firms are bigger, differentiated enough from each other that they now have more pricing power

Oligopoly

few firms, very differentiated products, high entry barriers

• delivery services (fedex, ups, dhl)

Monopoly

one firm, unique product, high entry barriers

• not allowed in U.S., but we experience one because of structure of companies

• Georgia Power is a monopoly, we have to use it and they can do whatever they want.

during periods of HIGH growth (industry speeding up)

• consumer demand rises

• price competition among firms decreases

during periods of NEGATIVE growth (industry slowing down)

• rivalry is fierce

• rivals can only gain at the loss of another

• common to have price discounts, promo periods , etc

strategic commitments

decisions that a firm will make to try and grow. hard to reverse and costly

• can help prevent competitors from joining industry

• can impact intensity of rivalry in the industry

exit barriers

considerations a firm has when thinking about possibly leaving an industry

• easy to leave restaurant industry

• hard to leave for Ford plant in small town

Complements (a sixth force)

something that adds value when used with the original product

• increase demand for primary product

• enhances profit potential

• apps on a phone

Co-opetition

cooperation among competitors to achieve a strategic objective

entry choices

• choosing to enter an industry

1. when

2. how

3. what

4. where

5. who

industry dynamics

a weakness of other models is that the are static

industry convergence

when unrelated industries begin to satisfy the same customer need

• caused by technological advances

• ex: media industry

strategic groups

a way as a leader to understand how companies can be categorized

• set of companies that pursue a similar strategy in the same industry

competitive rivalry is ______ between firms in the same strategic group

strongest

mobility barriers

restrict movement between strategic groups

• based on hard to reverse investments

strategic group dynamics

firm positioning, strategy, and groups can change over time

• one strategic group can split into 2 subgroups

strategic leadership

successful use of power and influence.

• directing, building/accomplishing goals, and enabling advantage

power

• formal authority (position)

• informal authority (persuasion)

COVID helped some companies…

learn that remote work is sometimes more efficient than coming into work.