BU381 Midterm (finished)

Achieving Competitive Advantage

Requires meeting customer needs either more effectively (with products or services that customers value more highly than those offered by rivals) or more efficiently (by providing products or services at a lower cost to customers).

Achieving Sustainable Competitive Advantage

• Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors

• Developing expertise and long-term competitively valuable capabilities that cannot be readily overcome by rivals

• Putting the constant quest for sustainable competitive advantage at centre stage in crafting the company’s strategy.

Five Basic Strategic Approaches

• Low-Cost Provider

• Broad Differentiation

• Focused Low-Cost

• Focused Differentiation

• Best-Cost Provider

Customer Value Proposition

Satisfying buyer wants and needs at a price customers will consider a good value.

Three Tests of a Winning Strategy

• Exhibits good fit with situation

• Results in competitive advantage

• Promotes superior performance

The Fit Test

Does it exhibit good fit with the external and internal aspects of the firm’s dynamic situation?

The Competitive Advantage Test

Is it helping the company achieve a sustainable competitive advantage?

The Performance Test

Is it producing superior performance, as indicated by the firm’s profitability, financial and competitive strengths, and market standing?

Strategy Making/Execution Process

1. Develop strategic vision, mission, and core values

2. Set objectives

3. Craft strategy to achieve objectives and company vision

4. Execute strategy

5. Monitor performance and initiate corrective adjustments

Strategic vision

is the long-term direction and purpose of a company that outlines what it wants to achieve and how it plans to get there

• Uses specific language and is graphic/forward looking

• Is focused and avoids broad language/dwelling on the present

Example: Pacific Market

• Grow same-store volume by 50% so that 50% of net profits fund the Good Karma Foundation

Why?

• Crystallizes senior exec. views about firm’s long-term direction

• Helps org. prepare for the future and align resources towards achieving its objectives.

Mission statement

Describes the firm’s present purpose - “who we are, what we do, and why we are here”

• Identifies product/services, and markets to be served

• Own identity that sets the firm apart from its rivals

Example: Zoom

• To democratize video communications, creating frictionless and secure collaboration experiences for all

Core values

Beliefs, traits, and behavioral norms that employees are expected to display in conducting business and pursuing strategic mission and vision

Example: Zoom

• Care, customer first, integrity & security

Stretch objectives

Ambitious goals pushing firms beyond typical performance

Why do they promote better overall performance?

• Increase urgency for improving financial performance/competitive position

• More intentional and focused in actions

• Create an exciting environment where best talent wants to be

Balanced Scorecard

Framework that strives to place balanced emphasis on both financial and strategic objectives

Four dimensions

• Financial

• Customer

• Processes (related to improving productivity/quality)

• Organizational Objectives

PESTEL

Political

Economic

Sociocultural

Technological

Environmental (natural)

Legal/regulatory concerns

Porter’s Five Forces

Threat of rivals

Threat of new entrants

Threat of substitutes

Supplier bargaining power

Buyer bargaining power

Threat of rivals

Competitive pressures

• Buyer demand is growing slowly/declining

• Switching costs for buyers

• Products becoming less differentiated

• Competitors are growing and gaining capabilities

• High exit barriers prevent weak firms from leaving

Ex. Pacific Market

• Very low switching costs and large box grocery stores margins represent large risk

Threat of new entrants

Competitive pressures

• Strength of barriers to entry

• Expected defensive reactions of incumbents

• Attractiveness of the market’s growth/profit potential

• Capabilities/resources of potential entrants

Entry barriers

• Economies of scale in production

• Strong “network effects” for customer demand

• Required capital investments are high

• Restrictive regulations/policy

Threat of substitute goods

Competitive pressures

• Substitutes are readily available and attractively priced

• Comparable or better performance features

• Low switching costs for buyers

Supplier power

Competitive pressures

• Demand/availability for suppliers’ products

• Size/number of suppliers relative to industry members

• Possibility of backward integration into suppliers’ industry

• Availability of good substitutes for supplier's’ products

• Whether industry members are major customers of the supplier

Buyer power

Competitive pressures

• Degree to which industry goods are differentiated.

• Buyers’ costs for switching to competing sellers or substitutes.

• Number and size of buyers relative to number of sellers.

• Threat of buyers’ integration into sellers’ industry

• Product quality is a minor an issue and price is primary concern.

The Value Net

Focuses on interactions of industry participants for a particular company

• Competitors (rivals, new entrants, substitures)

• Complementors (producers of a product that enhances focal firm’s product when used together)

• Suppliers

• Customers

Strategic group analysis

Industry members with similar competitive approaches and positions in the market

• Ex. comparable product-line breadth, same distribution channels

Strategic group map:

• Identify competitive characteristics that delineate strategic approaches used in the industry

  • Variables should reflect important differences in rival approaches

SOAR Framework

Indicators of a rival firm’s likely strategic moves/counter moves

rival firm’s Strategy

rival firm’s Objectives

rival firm’s Assumptions about itself/industry

rival firm’s Resources and capabilities

Industry attractiveness

Depends in large part on whether a company has the resources and capabilities to be competitively successful and profitable in that environment

SWOT

Strengths (internal)

• Competence

  • Activity a firm has learned to perform proficiently

• Core competence

  • Activity a firm performs proficiently and is central to strategy

• Distinctive competence

  • Competitively important activity that represents a superior internal strength

Weaknesses (internal)

• Deficiencies in physical, organizational, or intangible assets

Opportunities (external)

Threats (external)

Resources/Capabilities

Resources

• A productive input/competitive asset owned or controlled by a firm

Capability

• Capacity of a firm to perform some activity proficiently

Dynamic capabilities

• Ongoing capacity of a firm to modify existing resources and capabilities/create new ones

VRIN

Tests the competitive power of an organizations resources/capabilities

Valuable

• Is the resource competitively valuable?

Rare

• Is it something that rivals lack?

Inimitable

• Is it hard to copy?

Non-substitutable

• Are substitutes to the resource/capabilities present?

Ex. Amazon’s distribution network

Proactive vs. Reactive Strategy

Proactive (deliberate) strategy

• Planned initiatives to improve company’s financial performance and secure a competitive edge

Reactive (emergent) strategy

• Strategy elements developed on the fly in response to fresh market conditions

Social complexity

Factors in a firm’s culture that contribute to its competitive advantage

• Interpersonal relationships among managers or R&D teams

• Trust-based relations with customers or suppliers

Ex. Lincoln Electric

• Strong relationships with employees through MBWA and piece-rate system fosters innovation and collaboration

Causal ambiguity

Ambiguity about how the firm uses its resources and relationships makes it difficult to imitate these complex resources.

Company’s value chain

Identifies the primary activities and related support activities that create customer value.

• Deep look into the firm’s cost structure and emphasis on differentiation activities

• Value chain analysis uses activity-based costing to evaluate activities

Primary activities

• Operations

• Inbound/outbound logistics

• Marketing & Sales

Support activities

• Procurement

• Tech. Development

• HRM

Ex. Zoom

Primary - low-latency communications (outbound logistics)

Support - cloud native platform (tech. development)

Industry value chain

Includes:

• Company’s internal value chain

• Value chains of backward industry suppliers

• Value chains of forward channel intermediaries

Why?

• Costs/margins of channel members impact end consumer price

• Channel member activities impact sales and customer satisfaction

Value Chain → Competitive Advantage

1. Differentiation based - beat rivals by creating more value from value chain

2. Cost based - beat rivals by conducting value chain activities more efficiently

Three key actions for strategy execution

1. Staffing the organization

2. Acquiring, developing, and strengthening other resources

3. Structuring the organization and work effort

Staffing the organization

Putting together a strong management team

• Planners who can ask tough questions and figure out what needs to be done

• Implementers who can select, manage, and lead the right people

Recruiting, Training and Retaining Capable Employees

• Screen and evaluate to ensure selecting those who are best-suited and best-fitted

• Offer challenging, interesting, and stretching assignments

Organizational structure

Formal and informal arrangement of tasks, responsibilities, lines of authority and relationships for the firm

Types of Org. Structure

Simple

• Flat, owner managed structure with no hierarchy

Functional

• Organizes the firm into departments by specialty

• Reports to manager, who reports to CEO

Multi-Divisional

• Semi-autonomous divisions by product line, geography or segment

Matrix

• Combines functional and multi-divisional structures

Centralized Decision making

Authority is retained by top management

Advantages

• Eliminates potential for conflicting goals/actions

• Quick decision making and strong leadership in crisis situations

Disavdantages

• Lengthens response times because approval is required

• Does not encourage responsibility/initiative for lower-level managers

Decentralized Decision making

Authority is delegated to lower-level managers and employees

Advantages

• Encourages all employees to exhibit initiative/responsibility

• Spurs new ideas/creative thinking

Disadvantages

• Higher level managers unaware of actions taking place below them

• May impair cross-unit collaboration

Example: Zoom

• Decentralizes R&D into autonomous squads that can roll out 200 new features annually

Corporate Culture

The meshing of shared values, beliefs, and traditions that reflects a firm’s operating style, behavioral norms, ingrained attitudes, and work atmosphere

Why?

• Influences firm’s actions and approaches to conducting business

Strong-culture vs weak-culture

Strong

Deeply rooted widely-shared values, behavioral norms, and operating approaches

Ex. Lincoln Electric

• Employee empowerment and shared ownership mentality

Weak

Lacks values and principles that are consistently preached or widely shared

Ex. Pacific Market

• Inconsistent communication and old leadership habits

Embedding norms in the organization

Behavioral norms

• Screen applicants and hire those who mesh well

• Expect managers at all levels to be role models

• Have senior execs. frequently reiterate importance of values and principles

Cultural norms

• Encourage healthy peer pressure to conform to cultural norms

• Recognize people who excel in displaying values/ethical principals

Corporate Culture and Strategy

• Culture consistent with strategy energizes employees and enhances productivity

• Culture matched to the strategy focuses the attention of employees

Changing a problem culture

1. Identify facets of present culture impeding strategy execution

2. Specify clearly what should characterize new culture

3. Discuss about how problems w/ present culture and new behaviours improve performance

4. Follow with visible, forceful actions to ingrain new behaviours, practices, and norms

Culture Changing Actions

Substantive

• Replace executives who are resisting/obstructing needed changes

• Promote individuals who serve as role models for cultural behaviour

• Mandate culture training for all personnel

Symbolic

• Physical symbols represent the new culture

• Ceremonial events honour exemplary employees

Management by Walking Around (MBWA)

Used by leaders to stay informed about how well strategy execution is progessing

• Spending time w/ people at company, asking questions, listening to their opinions and concerns

Broad Low-Cost Strategy

Low costs on comparable products for a broad spectrum of buyers

• Pursue difficult to imitate savings (spend aggressively)

• Avoid reducing product quality

Advantages

• Increased market share from undercutting

• Larger profit margins at comparable prices

Risks

• Low price doesn’t attract new buyers

• Retaliatory price-cutting starts a price war

Focused Low-Cost Strategy

Concentrating on a narrow buyer segment and meeting their needs at lower costs than rivals.

Two avenues for achieving a cost advantage

1. Perform value chain activities more cost-effectively

2. Revamp the firm’s value chain to eliminate or bypass cost-producing activities

   • Selling direct to consumers

   • Streamlining operations

   • Reducing materials-handling and shipping costs.

Cost-cutting methods

• Economies of scale

• Learning curve effects

• Capacity utilization

• Technology efficiencies

• Motivating employees through incentives

Pros and Cons of Low Cost Strategies

When it works best

• High price competition

• Little differentiation

• High buyer power (low switching costs)

Pitfalls

• Rival discovers lower-cost value chain approach

• Cost reduction overemphasis results in poor quality

Broad Differentiation Strategy

Differentiated products for a broad section of buyers

Advantages

• Command premium prices and brand loyalty

Focused Differentiation Strategy

Concentrating on a narrow buyer segment by offering differentiated products/services

Value drivers of differentiation

Factors that create a perception of value

• Improve customer service

• Invest in R&D

• Strive for innovation/tech. advances

Successful sustainable differentiation approaches

Differentiation difficult to imitate

• Company reputation

• Unique product/service image

Differentiation creating switching costs

• Patent-protected innovation

• Relationship-based customer service

Pro’s and Con’s of Differentiation Strategy

When it works best

• Buyer needs/uses diverse

• Unique approach compared to rivals

Pitfalls

• Relying on imitable attributes

• Overspending on differentiation efforts

• Charging too high a price

Pro’s and Con’s of a Focused Strategy

When its attractive

• Market is niche enough to be profitable with growth potential

• Industry leaders/rivals have no interest in the segment

Pitfalls

• As segment attractiveness increases, it draws in more competitors

• Specialized preferences shift toward the majority of buyers resulting in more broad segment

Best-Cost (Hybrid) Strategy

Incorporating upscale product attributes at a lower cost than rivals

• Targets the value conscious buyer

When to use

• Differentiation is market norm

• Large number of buyers are value conscious

• Competitive space is located in the middle market

Offensive strategic moves

Strategic moves to improve a firm's market position

Examples

• Offer equally good/better product at lower price

• Leapfrogging competitors

• Hit-and-run/guerrilla marketing tactics (ex. flash mob)

  • Low-cost high impact awareness strategies

Best Targets for Offensive Attacks

• Market leaders in vulnerable positions

• Struggling enterprises on the verge of going under

• Runner-ups with weaknesses where challenger is strong

• Small firms with limited capabilities

Defensive strategies

Lower the risk of an attack and weakens its impact if it occurs.

1. Block avenues open to challengers

   • Introduce new features/models

   • Challenge quality/safety of rivals

2. Signal challengers retaliation is likely

   • Publicly announcing commitment to market share/prices

   • Maintain a war chest of cash

First mover advantages/disadvantages

Advantages

• Pioneering helps build a firm’s reputation/loyalty

• Property rights prevent rapid imitation

• Customers will thereafter face switching costs

Disadvantages

• Pioneering more costly than imitating with negligible learning curve

• Customer loyalty is low and products do not live up to expectations

• Market uncertainties make it difficult to determine what will be successful

Vertical integration strategies

Full integration

• Firm participates in all stages of vertical activity chain

Partial integration

• Firm builds positions in only selected stages of vertical chain

Tapered integration

• Mix of in-house and outsourced activity in any stage of vertical chain

Vertical integration advantages/disadvantages

Advantages

• Add to technological capabilities

• Strengthen competitive position

• Boost firm’s profitability

Disadvantages

• Large capital investment is risky

• Less flexibility in accommodating shifting buyer preferences

• New/different resource requirements

Outsourcing advantages/disadvantages

Advantages

• Performed better or more cheaply by specialists

• Improves organizational flexibility and speeds processes

• Allows focus on core business activities

Disadvantages

• Loss of control over activity coordination and quality

• Lack of incentives for outside parties to make investments specific to value chain needs of firm

Strategic Alliance vs JV

Strategic alliance

• Formal agreement between two or more separate firms in which they agree to work cooperatively toward some common objective

Joint venture

• Partnership involving the establishment of an independent corporate entity that shares revenues and expenses

Strategic alliances advantages/disadvantages

Advantages

• Minimize problems with M&A, vertical integration, outsourcing

  • Lower initial investment/risks

  • More quickly deployed

• Useful for international expansion/diversification strategies

• Useful when industries are facing rapid tech. advances

Disadvantages

• Culture clash and integration problems

• Risk of becoming dependent on partner firms for capabilities

• Gains not materializing due to overly optimistic synergy views/poor fit of partner resources and capabilities