MGMT 4513 Midterm Frederico Aime

Strategic Management definition

the study of why some firms outperform

others

Mission

Statement Explaining why company exists

•Provides context for all decisions

within the organization

•Describes and enduring reality

•Is capable of infinite fulfillment

(no time frame)

•Useful for both internal and

external audiences

Vision

Crystallization of what leaders

want firm to be

•Guides development of strategy

and organization

•Describes an inspiring new

reality

•Is achievable within a specific

time period

•Primarily useful internally

(slogans can be used externally)

Strategy

How to beat present and

potential competitors

•Lists set of actions to provide

products or services that create

more value than their cost

•Describes the "value proposition"

chosen by the company

•Constantly changes in response to

analysis, trial and error

•For internal use

The economic value model

strategy objective is to maximize shareholder wealth

Objectives other than wealth creation

objectives that are used as surrogates for eventual wealth or the fulfillment of a mission

Stakeholder surplus model

Defines beneficiary group and maximizes wealth for total group

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

Objectives other than Wealth Maximization

•Risk aversion / tolerance

•Satisfying

•Nonwealth-based

•Mission-based

Two approaches for evaluating firm performance

1. Financial ratio analysis

2. Stakeholder perspective

Financial Ratio Analysis

Balance Sheet

Income Statement

Stakeholder perspective

employees

customers

owners

Stakeholders

•Individuals and groups who can affect, and are affected by, the

strategic outcomes achieved and who have enforceable claims on a

firm's performance

•Claims are enforced by the stakeholder's ability to withhold essential

participation

Capital Market Stakeholders

•Shareholders and lenders expect the firm to preserve and enhance

the wealth they have entrusted to it

•Returns should be commensurate with the degree of risk to the

shareholder

Product Market Stakeholders

primary customers, suppliers, host communities, unions

Organizational Stakeholders

employees, managers, non-managers

Two issues affect the extent of stakeholder involvement in the firm

•How to divide returns

to keep stakeholders

involved?

•How to increase

returns so everyone

has more to share?

General environment

Focused on the future

Industry Environment

Focused on factors and conditions influencing a firm's profitability within an industry

Competitor Environment

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

Porter's Five Forces

threat of entry, threat of substitute, supplier power, buyer power, and competitive rivalry

switching price

price at which product value equals value of next best alternative for that customer or segment

high barriers to entry reduce ___________

threat to new entrants

Economies of Scale

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

product differentiation

•Unique products

•Customer loyalty

•Products at competitive

prices

capital requirements

•Physical facilities

•Inventories

•Marketing activities

•Availability of capital

Buyers can threaten an industry by _________

•Force down prices

•Bargain for higher quality or

more services

•Play competitors against

each other

A buyer group is powerful when:

•It is concentrated or purchases large

volumes relative to seller sales

•The products it purchases from the

industry are standard or undifferentiated

•The buyer faces few switching costs

•It earns low profits

•The buyers pose a credible threat of backward integration

•The industry's product is unimportant to the quality of the

buyer's products or services

Suppliers can exert power by _______________

threatening to raise prices or reduce the quality of purchased goods and services

A supplier group will be powerful when:

-The supplier group is dominated by a few companies and is more concentrated than the industry it sells to

-The supplier group is not obliged to contend with substitute products for sale to the industry

-The industry is not an important customer of the supplier group

-The supplier's product is an important input to the buyer's business

-The supplier group's products are differentiated or it has built up switching costs for the buyer

-The supplier group poses a credible threat of forward integration

The threat of substitute products increases when:

buyers face few switching costs, the substitute product's price is lower, substitute product's quality and performance are equal to or greater than the existing product

Differentiated industry products that are valued by customers reduce_____________

threat of substitutes

Industry rivalry increases when:

-There are numerous or equally balanced competitors

-Industry growth slows or declines

-There are high fixed costs or high storage costs

-There is a lack of differentiation opportunities or low switching costs

-When the strategic stakes are high

-When high exit barriers prevent competitors from leaving the industry

Two unassailable assumptions in industry analysis

1. No two firms are totally different

2. No two firms are exactly the same

Strategic groups

clusters of firms that share similar strategies

Strategic Dimensions

Extent of technological leadership, Product quality, Pricing policies, Distribution channels, Customer service

Business-Level Strategies

Are intended to create differences between the firm's competitive position and those of its competitors.

To position itself, the firm must decide whether it

intends to:

•Perform activities differently (cheaper process)

•Perform different (valuable) activities

Two Targets of Competitive Scope

broad scope

narrow scope

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

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 for Cost Leadership Strategy:

-Building efficient scale facilities

-Tightly controlling production costs and overhead

-Minimizing costs of sales, R&D and service

-Building efficient manufacturing facilities

-Monitoring costs of activities provided by outsiders

-Simplifying production processes

Competitive Risks for Cost Leadership

•Processes used to produce and distribute good or service may

become obsolete due to competitors' innovations

•Focus on cost reductions may occur at expense of customers'

perceptions of differentiation

•Competitors, using their own core competencies, may successfully

imitate the cost leader's strategy

Differentiation Strategy

an 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

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

Competitive Risks of Differentiation

1. price difference bw product and cost leaders becomes too large

2. differentiation ceases to provide value for which customers are willing to pay

3. experience narrows customers' perceptions of differentiated features

4. counterfeit good replicate features

Focus Strategies

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

Factors That Drive Focused Strategies

- Large firms may overlook small niches.

- A firm may lack the resources needed to compete in the broader market

- A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors

- Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

Cost Leadership Strategy Can frighten off 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 suppliers' power by:

•Being able to absorb cost

increases due to low cost

position

•Being able to make very large

purchases, reducing chance of

supplier using power

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 leader is well positioned to:

•Make investments to be first to

create substitutes

•Buy patents developed by

potential substitutes

•Lower prices in order to

maintain value position

Cost Leadership Strategy: Due to cost leader's

advantageous position:

•Rivals hesitate to compete on

basis of price

•Lack of price competition leads

to greater profits

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 well positioned relative to

substitutes because

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

differentiation strategy Defends against competitors because

brand loyalty to differentiated product offsets price competition

differentiation strategy Can mitigate buyers' power because

well differentiated products reduce customer sensitivity to price increases