Strategic Thinking Midterm

Pretty high-level

Corporate Strategy Vs Business Strategy

• Corporate Strategy: Focuses on industry attractiveness and the question: What businesses should we be in?

• Business strategy: Focuses on competitive advantage and how we should compete within a specific industry?

Strategy

• The overall plan for deploying resources to establish a favorable position

  • Characteristics of strategic decisions

    • Important

    • Involve a significant commitment of resources

    • Not easily reversible

• A firm’s theory about how to gain competitive advantage

• Link between the firm and its environment (the key to strategic analysis)

Value creation formula

Consumer surplus + Producer surplus

Competitive advantage

• The ability to deliver more economic value or a wider wedge between what customers are willing to pay and the cost it incurs than competitors.

• Important note: A company cannot have a competitive advantage if its losing money

Substitutes vs Rivalry

• Substitutes: Product that could substitute from a different industry.

  • From perspective of Lexus in the car industry: trains, planes

• Rivalry: Competition within the same industry.

  • From Lexus: Honda, Subaru, etc

Profitability Ratios (probably dont need to know formulas, just know they exist)

• Return on Equity (ROE)

  • Net Income/Shareholders equity

• Return on assets (ROA)

  • Operating profit/total assets

• Gross margin

  • (Sales-cost of material inputs)/Sales

• Net margin

  • Net income/Sales

Balanced Scorecard

• Holistic viewpoint of a company

• Key components

  • Financial perspective

  • Customer perspective

  • Internal Business Process

  • Learning and Growth

Shareholder vs Stakeholder, and a comparison of interests

• Shareholder: An owner of a company through shares of stock (usually)

  • Interests are primarily financial

• Stakeholder: A broader term that includes anyone who is interested or affected by the companies action. Might be a customer, supplier, or member of surrounding community

  • Interest varies depending on the role of the stakeholder but could be financial, social, environmental, or operational.

Spectrum of industry structures

• Perfect competition

  • Many firms

  • No barriers

  • Homogenous product

  • Perfect information

• Oligopoly

  • Few firms

  • Significant barriers

  • Potential for product differentiation

  • Imperfect availability of information

• Duopoly

  • Two firms

  • Significant barriers

  • Potential for product differentiation

  • Imperfect availability of information

• Monopoly

  • One firm

  • Highest barriers of entry

  • Potential for product differentiation

  • Imperfect availability of information

Industry Vs Firm effects, what matters more?

Firm effects matter more for profitability than industry effects

PEST analysis

• Political trends

• Economic trends

• Social trends

• Technology trends

Porters five forces

• Potential entrants

  • threat of new entrants

• Suppliers

  • Bargaining power of suppliers

• Substitutes

  • threat of substitutes

• Buyers

  • bargaining power of buyers

• Industry competitors

  • rivalry among existing firms

How does vertical integration effect porters 5 forces, when a supplier vertically integrates vs when a firm vertically integrates?

Sixth force of competition

Complements: The suppliers of complements create value for the industry and can can exercise bargaining power.

Identifying key success factors

• Analysis of demand—what do customers want?

• Analysis of competition—How does the firm survive competition?

Drivers of value creation

• Better or different stocks of resources and capabilities

  • know-how, brand name, physical location, complementary products, relationships, data access

• Better or different pattern of choices or activities

  • process, business model

• Scale and Scope effects

  • better or different value propositions, which relate to the above three factors

Resource heterogeneity and immobility

• Heterogeneity

  • If resources were all the same, there would be no differences in performance.

• Immobility

  • If not immobile, would be resource homogeneity and therefore no difference in performance.

Resource Classifications (fall into 3 main groups)

• Tangible

  • Financial and Physical

• Intangible

  • Technology

  • Reputation

  • Culture

• Human

  • Skills

  • Capacity for communication and collaboration

  • Motivation

Two approaches to identifying an organization’s resources and capabilities

• Starting from the inside

  • support activities and primary activities

• Starting from the outside

  • Identify key success factors → what resources and capabilities do we need to deliver them

3 aspects of the profit earning potential of a resource or capability

• Extent of the competitive advantage established

  • Scarcity

  • Relevance

• Sustainability of the competitive advantage

  • Imitatability

  • Substitutability

• Appropriability

Sources of competitive advantage

• Cost advantage

  • Similar product at lower cost

• Differentiation advantage

  • price premium from unique product

Drivers of cost advantage (7)

• Economies of scale

• Economies of learning

• Production techniques

• product design

• input costs

• capacity utilization

• residual efficiency

Blue Ocean strategy

Uncontested market spaces such as: new customer segments for or reconceptualizations of existing products, or novel recombination of product attributes

Sustaining Competitive Advantage against imitation (By 4 different imitation requirements and associated isolating mechanisms

• Identification → obscure superior performance

• Incentives for imitation → deterrence: signal aggressive intentions and pre-emption: exploit all available opportunities

• Diagnosis→ Rely upon multiple sources of competitive advantage to create causal ambiguity

• Resource acquisition → Base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Whats the key to strategy analysis?

The link between the firm (internal analysis) and its industry environment (external analysis)

Strategy implementation: McKinsey 7-S framework

1. Style

2. Skills

3. Systems

4. Structure

5. Staff

6. Strategy

7. Shared Values

All seven are the same size and work in tandem together, no ones more important than the other.

Two problems with integrating specialization , and the agency problem

• The need for cooperation

  • Agency problem

    • Employees goals don’t align with manager or owners goals

  • Solutions

    • Control through hierarchical supervision

    • performance incentives to align individual and firm goals

    • shared values to create common purpose

• The need for coordination

  • managing interdependency

  • solutions:

    • rules and directives

    • organizational routines

    • mutual adjustment

Mechanic vs Organic Organizational forms

• Mechanistic

  • tasks are rigid and highly specialized

  • rules and directives vertically imposed

  • communication is vertical

  • knowledge is centralized

  • environment is stable with low technological uncertainty

  • ex. Military

• Organic

  • tasks are flexible and broadly defined

  • common culture

  • vertical and horizontal communication

  • knowledge is dispersed

  • environment is dynamic with significant technological uncertainty and ambiguity

  • Ex. Google (formerly), Zapos

Two principles of strategy implementation

• Internal alignment

  • each element needs to be designed to reinforce the strategy

• contingent design

  • no single design is optimal for every firm or strategy

Industry life cycle

1. Introduction

2. Growth

3. Maturity

4. Decline

How does the traditional life cycle differ across industries?

• Technology-intensive industries (Pharma, semiconductors, computers) may retain features of emerging industries

• Other industries (especially those providing basic necessities, e.g food, construction, apparel) reach maturity but not decline

• Industries (like motorcycles or TVs) may experience life cycle regeneration

Dual strategies and organizational ambidexterity

• Dual strategies

  • Firms need a strategy for today that exploits existing resources and capabilities and current market conditions, and a strategy for tomorrow that prepares the firm

• Organizational ambidexterity

  • Firms need to:

    • exploit existing resources

    • explore new opportunities for the future

Dynamic capabilities, and the 3 types

• A firms ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments

• 3 types

  • sensing and shaping opportunities and threats

  • seizing opportunities

  • maintaining competitiveness through enhancing, combining, protecting, and when necessary reconfiguring assets

Combatting Organizational Inertia

• Creating perceptions of crisis

• establishing stretch targets

• organizational initiatives

• reorganizing company structure

• new leadership

• Scenario analysis

How are the benefits from innovation distributed?

• Depends on the industry but,

  • split between customers (usually derive the most), innovators, imitators, suppliers, and sometimes complementors

Profitability of innovation, and what it depends upon

• Value of the innovation to users

• innovators ability to appropriate the value of the innovation depends upon:

  • legal protection

  • complementary resources

  • imitability of the technology

  • lead time

Entrepreneurship Vs Innovation

• Entrepreneurship

  • Starting a business/organization

• Innovation

  • Expanding upon an existing product

Alternative strategies for exploiting innovation (and examples)

• Licensing

  • low risk but limited returns

  • ex. ARM licenses its microprocessor designs to several semi-conductors

• Outsourcing certain functions

  • reduces investment, but means dependence on suppliers and partners

  • Apple outsources manufacturing to Foxconn

• Strategic Alliance

  • Benefits of flexibility and speed, but coordination risk

  • BioNTech/Pfizer alliance to develop covid-19 vax

• Joint Venture

  • Reduces investment and risk, but partner disagreement likely

  • Cellcentric a joint venture between Daimier and volvo to develop a fuel-cell truck

• Internal commercialization

  • Biggest risks and benefits, allows complete control

  • Page and Brin establish Google inc. to commercialize their search engine.

Organizational initiatives to stimulate innovation

• Cross functional new development teams

• product champions

• buying innovation

• open innovation

• corporate incubators

Hypercompetition/Shumpeterian competition, and how it changes industry structure

• Schumpeterian competition

  • a “perennial gale of creative destruction'“—market leaders overthrown by innovation

• Hypercompetition

  • “Intense and rapid competitive moves…continuously creating a new competitive advantage and destroy existing competitive advantages

Contributions of Game Theory to Competitive analysis

1. Frames strategic decisions as interactions between competitors

2. Predicts outcomes of competitive situations involving a few, evenly-matched players

3. Provides key insights into the nature and determinants of interactions among competitors. E.g:

   a. Competition and cooperation, shows conditions where cooperation more advantageous than competition

   b. Deterrence

   c. Commitment

   d. Signaling

Problems of game theory

• Able to explain past competitive behavior-weak in predicting future behavior

• Lack of an integrated general theory—Many different models: outcomes highly sensitive to small changes in assumptions

• Many times players are not rational (behavioral bias)

3 dimensions of scope (all corporate-level)

• Vertical scope

  • Ex. Spotify singles: asking singers to record songs for Spotify OR acquiring find away who produces audio books

• Geographic scope

  • expanding abroad into new markets

  • Ex. Starbucks opening stores in south africia

• Product scope

  • ex. Spotify expanding into podcasts, audio books, and e learning

Key Questions with Corporate Level Strategy

• Is single integrated firm > sum of several specialized firms?

• Is the corporate whole worth more than the sum of the parts under independent ownership?

Benefits of vertical integration

• Technical economies from integrating processes e.g iron and steel production—but doesn’t necessarily require common ownership

• Superior coordination

• Entry barrier

• Access to and more control over inputs and distribution (to differentiate and to reduce supplier/buyer power)

• Information leakage

• Avoids transaction costs of market contracts in situations where:

  • small number of firms

  • transaction specific investments

  • opportunism and strategic misrepresentation

  • taxes and regulations on market transactions

• Owner economics

  • capture the profit margin in that part of the industry/vertical value chain

Costs of vertical integration

• Differences in optimal scale of operation between different stages of production prevent balanced vertical integration

• Inhibits development of distinctive capabilities

• Difficulties of managing strategicially different businesses

• Incentive problem: lack of high powered incentives

  • need to perform to the best of your ability-best quality at low price if you cant do that buyers will move to a new supplier

• Limits flexibility

  • in responding to demand fluctuations

  • in responding to changes in technology, customer preferences, etc.

• Compounding of risk and opportunity costs

  • taking away money from other opportunities

• Competitive effectiveness problems: lose buyers bc of competing in another stage

• Rareness of owner economics:

  • premium to overcome entry barriers

    • pay so much to enter that you may never earn the money back

  • Challenges of exploiting competitive advantage twice

Recent trends in vertical relationships

• From competitive contracting to supplier partnerships e.g in autos

• From vertical integration to outsourcing (not just components, also IT, distribution, and admin services)

• Diffusion of franchising

• Technology partnerships

• Inter-firm networks

• CONCLUSION: Boundaries between firms and markets are becoming increasingly blurrer

Factors to consider when going global

• Industry factors (Competitive fit)

• Country-specific factors (Location fit)

• Firm-specific factors (Firm fit)

Effects of internationalization on industry environment

• Lower barriers to entry into international markets

• Increased industry rivalry → increased intensity of competition

• Increased buyer power

• All things equal, internationalization tends to reduce an industry’s margins and return on capital

The theory of comparative advantage

A company has a comparative advantage in those products that make intensive use of resources that are abundant within a country.

• Philippines more efficient in producing footwear, apparel, and assembled electronic parts than in the production of chemicals and automobiles

• U.S. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts

When XC rates are well-behaved comparative adv. translates into competitive advantage

Porter’s competitive advantage of nations (3 factors)

• International competitive advantage is about companies not countries—the national environment provides a home base for the company

• Sustained competitive advantage depends upon dynamic factors—innovation and the upgrading of resources and capabilities

• The critical role of the national environment is its impact upon the dynamics of innovation and upgrading

Porter’s national diamond framework

1. Factor conditions

   1. “home grown” resources and capabilities more important than natural endowments

2. Related and supporting industries

   1. Key role of “industry clusters”

3. Demand conditions

   1. Discerning domestic customers drive quality and innovation

4. Strategy, structure, and rivalry

   1. E.g domestic rivalry drives upgrading

Ghemewat’s CAGE framework

• Cultural distance

  • different languages, social norms, religions

  • Affects industries with high linguistic content or cultural content

• Administrative and political distance

  • Absence of shared political or monetary association

  • political hostility and weak legal/financial institutions

  • affects industries viewed by gov. as strategically important

• Geographical distance

  • Lack of common border, transportation/communication links

  • Affects perishable, fragile, and value-to-weight products

• Economics differences

  • difference consumer incomes

  • affects products with elastic demand (luxuries)

3 factors influencing location decisions

• National resource conditions (does that location have what they need)

  • what are the major resources which the product requires? Where are these available at low cost (or best quality)

• Firm-specific advantages (can what they’re good at but transferred to other location)

  • to what extent is the company’s competitive advantage based upon firm-specific resources and are these transferable?

• Tradability issues (how are they gonna get product there)

  • Can the product be transported at economic cost? if not, or if trade restrictions exist, then product must be close to marker

Globalization and global strategy

• Globalization

  • Increasing interdependence and homogeneity among countries

• Global strategy

  • Simply: Treating the world as a single market

  • Sophisticated: Strategy that recognizes and exploits linkages between countries

Forces for Globalization vs National differentiation

Globalization: (focus globally)

• Cost benefits of scale and replication

• Serving global customers

• Exploiting arbitrage benefits from national resources

  • e.g natural resources, low labor costs, knowledge

• Learning in multiple national environments

• Competing strategically—cross-subsidization

National Differentiation: (why you shouldnt focus globally, and focus on winning home market)

• Transportation and communication costs arising from geographical distance and remoteness

• Difference in customer needs and behavioral norms arising from cultural factors

• Market and infrastructure differences

Ghemawat’s AAA triangle

• Adaptation

  • adjusting to local markets

  • proxy: advertising to sales ratio

• Aggregation

  • standardizing products/services across regions to achieve economies of scale

  • proxy: R&D to sales ratio

• Arbitrage

  • Exploiting differences between countries to reduce costs or enhance performance

  • proxy: labor cost to sales ratio

The Transnational

An integrated network of distributed, interdependent, resources and capabilities

• Each national unit a source of ideas and capabilities that can benefit the whole corporation

• Each national unit becomes world source for a specific product, component, or activity

• Corporate center orchestrates collaboration through creating the right organizational context

Challenges in going global

• Liability of foreignness

• Increasing complexity

• Conflicting pressures

  • managing the tension between standardization (aggregation) and customization (adaptation)

  • and between host and home country gov. interests

• Managing trade-offs among time, risk, control, and learning

• Difficulty in transferring the capabilities to new international operations

• disadvantage or parity in the capabilities relative to new competitors

• Less value in the capabilities to new customers and context

Motives for diversification

• Growth

  • tends to destroy shareholder value

• Risk spreading

  • reduces the variance of profit flows but doesn’t create value for shareholders

• Value creation (most viable)

  • bringing different businesses under common ownership must increase their total profitability

Porter’s three essential tests for diversification

1. The attractiveness test: diversification must be directed towards attractive industries (or those with the potential to become attractive)

2. The cost of entry test: the cost of entry must not capitalize all future profits

3. The better off test: either the new unit must gain competitive advantage from its link with the company, or vice-versa

Sources of competitive advantage from diversification

1. Economies of scope

   1. sharing tangible and intangible resources

   2. Transferring functional capabilities (marketing, product development)

   3. Transferring/applying common general management capabilities to different businesses

2. Economies from internalizing transactions

   1. can avoid external transactions by operating internal capital and labor markets

Operational vs Strategic relatedness (and the problem with operational)

Operational:

• Synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)

• Problem → the benefits from economies of scope may be dwarfed by the administrative costs involved in their exploitation

Strategic:

• Synergies at the corporate level deriving from the ability to apply common management capabilities to diff. businesses

What type of diversification is best?

• Not a one size fits all but usually moderate levels with related diversification

Product vs Resource relatedness

• Resource relatedness is far more important than product in determining whether to diversify

• Ex. Mars with dog food, McDonalds with hotels (for a little)

Motives for M&A

• Managerial

  • management compensation based on firm size

  • psychological rewards, celebrity status

• Financial motives

  • stock market inefficiencies

  • quest for tax savings

  • financial re-engineering

• Strategic motives

  • Geographical extension

  • Horizontal and Vertical

  • Diversification

Is M&A successful?

Largely no or inconsistent findings. Seems like it could be if they’re small and systematic M&A (like apple)

Challenges of M&A

• Difficulties in estimating the benefits of M&A

• Problems of integration

• Building acquisition capability

• Matching post-merger management to the strategic goals of the merger

Types of strategic alliance

• Strategic Alliances

  • Collaborative arrangements made by 2 or more firms to pursue common goals

  • alliance goals: technological, marketing and distribution, operational, standard setting, lobbying

  • Can be formal or informal

  • Equity (partners take equity stakes in one another) or non-equity

• Joint ventures

  • partners form a jointly-owned enterprise to pursue the goals of the alliance

Zara Case Study

• Zara is very vertically integrated

  • able to design and output new clothes in 2 weeks, compared to industry average of 9 months

  • allows them to capitalize on trends

• Also very globally integrated

  • create small batches and rely on feedback from managers

  • as the company expands, facing struggles in transferring strong management across regions

• Main issues:

  • Online shopping

    • bad online storefront design

    • supply chain designed to ship to stores not directly to consumers

Manchester City Case Study

• New ownership created a multinational corporation with “city” football teams all around the globe.

  • common identity across clubs “city way”

  • expands the fanbase and bring in more revenue

  • arbitrage advantage for Man City in attracting/developing talent

    • builds into emphasis on youth development

• Emphasis on technology

  • data analysis in tracking team performance

• Achieved economies of scale in

  • scouting

  • leverage over broadcasting rights

  • sponsorship deals

Google (now Alphabet) Case Study

• Strategic clarity issue

• Overly diversified its businesses

  • didn’t diversity industries where they were able to achieve economies of scope or synergies

  • Resources weren’t related

  • lack of strategic relatedness

• Lack of incentive for employees—driven by transition to Alphabet