Strategy Innovation Global Competition Midterm Fall 2021

Five Forces

threat of new entrants, bargaining power of suppliers, threat of substitutes for the industry's products, bargaining power of buyers, rivalry among competitors

vertical (3) of five forces

Threat of new entrants, rivalry, threat of substitutes -- whether there is much profit to be made/available

horizontal (3) of five forces

bargaining power of suppliers, rivalry, bargaining power of buyers -- how value/profit is distributed between suppliers, industry firms, and buyers

fragmentation

a large number of individuals in a space (suppliers, industry firms, or buyers) -- giving that section a disadvantage

concentration

a small number of individuals in a space (suppliers, industry firms, or buyers) -- giving that section an advantage

Barriers to entry

High B to E Reduce the threat of new entrants -- ex. economies of scale, network effects, switching costs, high capital requirements, incumbency advantages, unequal access to distribution channels, restrictive government policy

Switching Costs

Costs incurred when changing products/services consumed (includes time and effort and money)

Substitutes

another good or service that meets the desired need of the consumer -- threat is high if the substitute has good performance at an attractive price, low switching costs of the buyer

Network Effects

increases value for the consumers when more buyers or firms are also using the product or service (ex. phones, LinkedIn)

Economies of Scale

Increased size of production over maintaining fixed cost = lower fixed cost per unit produced

Vertical Integration

Operating in more stages of the value chain (backward/supplier or forward/distributor)

backward vertical integration

an industry firm entering the supplier market (strategically helps when an industry market is fragmented and the supplier market is concentrated because the firm would avoid the issue of supplier power)

forward vertical integration

an industry firm entering the distribution or retail market/operations closer to the consumer (strategically help if the distribution market is concentrated and the industry firms are fragmented)

Competitive Advantage

a company earns more profit than the industry average because: its costs are lower than the industry average or earns more revenue than the industry average, or a combination of the two

sustainable competitive advantage

a type of competitive advantage that a firm can continue to use and other firms cannot easily replicate (VISOR criteria)

Four Generic Strategies

Overall cost, overall differentiation, Cost focus, differentiation focus

Overall Cost

Broad scope and low cost strategy

Overall differentiation

broad scope and differentiated

cost focus

narrow scope, low cost

differentiation focus

narrow scope, differentiation

Sources of cost advantage

economies of scale, economies of scope, learning and experience, proprietary knowledge, lower input costs, a different business model

Economies of scope

increases in efficiency (cost savings or reductions) due to sharing activities across products

learning and experience

After producing a few products, the firm will be able to produce them cheaper and better

different business models

technology-enabled, selling direct, subscriptions, third-party-pay

sources of differentiation advantage

different product features, higher quality/reliability, convenience/location, brand image

Willingness to pay

the maximum price at or below which a customer will definitely buy a product or service

Value chain

the set of value creating activities that occur as a firm takes raw materials and turns them into finished goods

Resource-based view

a method of analyzing and identifying a firm's strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles as an organization -- resources and capabilities can be physical, financial, human, organizational, or intangible

Resource based view of the firm

a firms resources and capabilities can produce a sustained competitive advantage by creating value for customers by lowering costs, providing something of unique value or some combination of the two

Physical resources

Plant and equiptment

Financial resources

Cash, ability to borrow, ability to generate cash flow

Human resources

(knowledge, skills, abilities, judgement, intelligence)--individual level; (relationships, trust, collaboration)--group level

Organizational

Reporting structure, standards and operating procedures, formal and informal planning processes, systems and processes for controlling and coordinating

Intangible resources

brand, image, reputation, organizational culture, employment brand

VISOR Criteria

Valuable (must create value), expensive or difficult to Imitate, no Substitutes exist (for the valuable resource), Organized to leverage the resource, Rare among competitors

External analysis (STEEP)

socio-cultural, technological, economic, ecological, political-legal

External analysis Important Points

external factors influence strategy, firms should scan the environment regularly, external analysis helps identify threats and opportunities, it must be done relative to the businss model, helps make decicions like how to exploit opportunities and defend the firm against threats

Threat

an element in the environment that is causing difficulty for the firm or could cause difficulty in the future

opportunity

circumstances that make it possible to do something good for the firm

process for external analysis

1. understand the firms business model
2. understand what the firm depends on in the business envinronment
3. Use STEEP to identify current and future threats and opportunities
4. rank the threats and opportunities by importance
5. formulate responses to the most important ones

strength

a valuable resource or capability possessed by the firm

weakness

an internal characteristic of the firm that places the firm at a disadvantage

business model

the rationale for how an organization does or could succeed

value proposition

why certain kinds of customers buy the firm's products/services

Three dimensions of corporate scope

geographic, horizontal, vertical

horizontal diversification

operating in an adjacent or unrelated market that is not in a value chain of the firm

vertical integration

operating in more stages of the value chain

geographic dimension

where in the world a company operates

objectives of corporate strategy

to create and capture more value as a group of businesses than the businesses could create and capture on their own

better off test

if the presence of the corporation in a given market improves the competitive advantage of other business units over and above what they could achieve on their own -- does the net profit or willingness to pay increase after two products come together?

Ownership test

Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce? -- financial analysis

Organizational Test

can the firm organize the two businesses in a way that realized the value creation potential?

Innovative strategy

must be dynamic due to changes in competitive offerings and customer needs

Eliminate activities in the value chain

Most common type of innovative strategy is to eliminate the step closest to the customer (netflix, amazon, southwest)

Balanced Scorecard

strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals

How to construct a balanced scorecard

1. identify a strategy 2. identify a financial goal 3. Identify a customer segment and their needs 4. identify relavent processes 5. identify learning and growth incentives

pros of balanced scorecards

balances short and long term incentives, encourages conscious monitoring of strategic objectives, lead indicators and lag indicators

con of balanced scorecard

the multiplicity of measures can seem confusing, hard to put quantifiable measures on things

4 perspectives of balanced scorecard

financial, customer, internal business processes, learning and growth

three C's of when vertical integration is appropriate

Capabilities (the firm has the capabilities to do an activity well and current partners may not) Coordination (the firm can coordinate a new activity with other activities in the firm and become better and more profitable by doing so) Control (over quality or valuable materials, resources, or activities)

Two Fs of risk of vertical integration

Loss of Focus (difficult to do many activities well, potential loss of quality or effectiveness) Less Flexibility (more difficult to switch suppliers or distributors after committing to its plan it harder to readjust)

Cases when ownership is appropriate

high transaction costs, uncertainty and incomplete contracts, transaction-specific assets, durable relationship, intellectual property, urgency

Contractual relationships are better than ownership relationships when...

the incentives for performance are important, when efficiency is important