CM

Competitive Advantage and Strategic Management Terms (Video Notes)

Porter's Five Forces

  • Forces: existing competitors, new entrants, suppliers, customers, and substitutes.
  • Core claim: the weaker these forces act upon an organization, the more likely the firm will enjoy long-term success; the stronger the forces, the greater the challenges and the likelihood of decreasing performance over time.
  • Elasticity of demand is also relevant to competitive dynamics (see below).

Competition

  • The ability for a firm to enjoy significant profit margins decreases as the number of competitors offering essentially the same products or services increases.
  • If customers believe an organization provides higher quality goods or better service, the organization can charge a premium, gain market share, or both.

New Competitors

  • If it is easy to start a competing firm that provides the same product, it will be hard for an existing business to ensure long-term financial stability.
  • Barriers to entry: factors that make it difficult for competitors to enter the market; strong barriers decrease the strength of this force.
  • Conversely, low barriers to entry allow new competitors to erode profit margins.

Suppliers

  • The relative strength of suppliers impacts a firm’s profitability.
  • Historical example: in the 1950s, unions exercised control over labor supply, making automakers less profitable as labor costs rose; firms spent less on tooling and upgrading factories, enabling foreign manufacturers with newer facilities to gain market share.

Economies of Scale

  • Economies of scale means using large production or purchasing power to proportionally reduce marginal costs while maintaining or increasing profitability.
  • Example: Walmart pressures suppliers to lower prices due to its large customer base; if a supplier raises prices, Walmart can threaten to switch suppliers because of its scale and purchasing power.

Buyers

  • If a single buyer represents a significant percentage of a supplier’s sales, that buyer can exert substantial control.
  • The Internet has greatly increased the information available to buyers and the number of suppliers from which buyers can choose.

Substitutes

  • The ability of buyers to substitute one product for another impacts a company’s ability to raise prices.
  • Existence of suitable substitutes inhibits arbitrary price increases and constrains profitability.

Competitive Advantage and MIS

  • Competitive advantages are attributes that allow firms to provide goods/services with higher perceived value than competitors.
  • Customers may perceive higher value due to lower price, higher quality, or both.
  • Management information systems (MIS) enable managers to build upon an organization’s strengths to create competitive advantages.

Monopolistic Competition

  • Monopolistic competition means creating a brand image that customers perceive offers greater value than a competitor’s product.
  • MIS provides a multitude of tools to assist managers in a competitive marketplace.
  • Advanced inventory management systems help optimize inventory levels to avoid shortages and minimize losses due to spoilage or excess inventory.

SWOT Analysis

  • SWOT analyzes internal strengths and weaknesses and external opportunities and threats.
  • Useful in strategic planning to identify where to leverage advantages and mitigate risks.

5 Ps of an Internal Scan

  • Five internal factors to examine:
    • Personnel (human resources)
    • Plant (physical resources)
    • Processes (activities that create value)
    • Purse (financial strength)
    • Past experiences (reputation and intangible assets)

PESTEL Analysis

  • External environment scanning framework: Political, Economic, Socio-cultural, Technological, Environmental, Legal issues.

PESTEL Analysis Breakdown

  • Political factors: factors in government policy, regulation, and political climate that affect the organization.
  • Economic factors: overall state of the economy and cycles that influence demand, enrollments, spending, etc.
  • Socio-cultural factors: societal values/preferences that MIS can help track.
  • Technological factors: rapid tech advances creating competitive advantages for leaders in technology.
  • Environmental factors: environmental impact considerations and how IS can support sustainability.
  • Legal factors: safety, consumer rights, labor, advertising, health regulations; MIS supports compliance.

Porter's Generic Business Strategies

  • Two fundamental strategies: price leadership and product differentiation.
  • Each can be applied in two market scopes: broad markets and niche (focused) markets.

Price Leadership or Differentiation in Broad or Niche Markets

  • Price leadership: offer a product to a large market at the lowest possible price by maximizing efficiencies and leveraging economies of scale.
  • Economies of scale: production increases lead to lower costs per unit.
  • Differentiation: offer a product with unique qualities that command a higher price than a strict price leadership approach.
  • Niche market strategies: "focused price leadership" and "focused differentiation".

Red and Blue Ocean Strategies

  • Blue Ocean Strategy (Kim & Mauborgne, 2004): focus on differentiation while pursuing price leadership, creating new markets with no existing competition.
  • Red Ocean Strategy: compete in the same market by competing on price or product improvements.
  • Blue Ocean emphasizes creating entirely new markets through innovation rather than just differentiating existing products.

Christensen's Disruptive Innovation Model

  • Disruptive innovation uses technology to transform a market or create a new one.
  • Firms typically focus on customer service, differentiated product, or efficiency improvements to gain market share via pricing.
  • Disruptive efforts require allocating resources to improve existing products/processes; they carry significant risk.

Missed Opportunities in Disruptive Innovation

  • Disruptive tech often involves high risk and resource allocation that diverts from existing product improvements.
  • This can allow start-ups to gain competitive advantages with new technologies.
  • Examples: Sears failed to capitalize on online opportunity; Amazon capitalized on online retail; Netflix moved from mail-order to streaming while Blockbuster was strong in physical video.

Lieberman and Montgomery's First-Mover Advantage

  • First-mover advantages include:
    • Employee experience: early learning of technologies and processes.
    • Securing resources: access to raw materials and logistics ahead of competitors.
    • Customer adaptation: early entrants shape customer expectations and product specifications.

First-Mover Advantages (detailed)

  • Employee experience: learning curves and tacit knowledge gained by early teams.
  • Securing resources: control of supply chains and key inputs.
  • Customer adaptation: shaping standards and habits before competitors enter.

Fast-Follower Strategy

  • Observers Golder and Tellis: over 50% of innovative products fail; over 80% of successors succeed.
  • Fast follower leverages the innovator’s R&D and typically offers a competing product at a lower price.
  • Strategy emphasizes rapid market entry to attract early majority adopters.

Lean Manufacturing

  • Lean manufacturing extends Taylorist principles to all employees; focuses on excellence and continuous training.
  • Aims to minimize waste (in material and effort) across the organization.

The 5 Tenets of Lean

  • Specify the value of each product with precision.
  • Identify how each product gains value (the value stream).
  • Ensure value flows to the product without interruption by eliminating steps that do not add value.
  • Allow customers to pull increased value from the producer; nothing is created until demanded.
  • Relentlessly pursue perfection (Toyota’s Lexus slogan).

Six Sigma

  • Six Sigma aims to reduce variance in output to less than $3.4$ defects per million opportunities, and to minimize the total number of steps in a process.
  • Focus on reducing defects through data-driven analysis.

DMAIC and DMADV

  • Six Sigma uses acronyms to guide processes:
    • DMAIC (Define, Measure, Analyze, Improve, Control) for existing processes.
    • DMADV (Define, Measure, Analyze, Design, Verify) for new or redesigned processes/products.

Implementing Lean Using MIS Tools

  • Lean focuses on increasing efficiency by improving supply lines and training a capable workforce to minimize waste and maximize value.
  • MIS enables rapid communication and information flow so stakeholders can suggest improvements.

Implementing Six Sigma Using MIS Tools

  • Six Sigma relies on statistical data; MIS supports data collection and analysis during Measure and Analyze steps.
  • MIS helps in developing designs for pilot processes or prototypes after root causes are identified.

Improving Inventory Management with MIS

  • Inventory improvements can yield large competitive advantages.
  • MIS-enabled inventory management ensures minimal touches from creation to sale, stock availability, optimized shelf space, timely reorders, minimized obsolescence, and accurate stock tracking.

Just-In-Time (JIT) Inventory

  • JIT aims to minimize excess inventory and keep manufacturing lines agile to reduce costs and adapt to demand.
  • Requires exceptionally smooth supply chains; parts may not be purchased until needed in assembly.
  • When used effectively, JIT provides significant savings and competitive advantages.

Disadvantages of Just-In-Time Inventory

  • Vulnerable to supply disruptions (e.g., natural disasters).
  • Globalized supply chains increase risk of disruptions.
  • COVID-19 highlighted shortages and panic-buying due to insufficient on-hand inventory.

Key Numerical References and Concepts

  • Five forces framework (5 Forces).
  • Two generic strategies (price leadership, differentiation) across broad or niche markets.
  • Lean tenets (5).
  • Six Sigma target: less than $3.4$ defects per million opportunities ($ ext{DPMO} = 3.4$).
  • First-mover vs fast-follower success rates: >$50ackslash ext{%}$ fail rate for innovations; >$80ackslash ext{%}$ successors succeed.
  • Blue Ocean vs Red Ocean distinctions and market creation ideas.
  • Emphasis on mis/analytics in MIS-enabled strategies and quality initiatives.