Strategic management

What is Strategy (Porter)? Strategy is the creation of a unique and valuable position involving a different set of activities (with fit amongst the activities) with respect to rivals. 

Importance/increased difficulty of strategy; increased globalization, rate of technological change, knowledge availability and intensity and hyper-competition 

Competitive Advantage: A firm achieves competitive advantage when it implements a strategy that creates superior value for customers vis-à-vis competitors when firm’s profitability > avg. of all other firms in the same industry. 

Sustainable Competitive Advantage: when strategies enable firm to maintain above-average profitability for several years 

Valuing Value Creation: If firms create a product or service, IF customers value & buy, sales & profits increase, when value creation occurs, share price increases and Profitability is OUTCOME of value creation 

The stakeholder approach: The firm is a coalition of interest groups—it seeks to balance their different objectives. 

The shareholder approach: The firm exists to maximize the wealth of its owners. 

Four Attributes of Resources and Capabilities for Sustainable Competitive Advantage 

• valuable; allow the firm to exploit opportunities or neutralize threats in its external environment 

• rare; possessed by few, if any, current and potential competitors  

• costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost 

• Non substitutable; No equivalents 

External environment analysis; is a continuous process which includes; scanning, monitoring, forecasting, assessing environmental changes and trends. 

• Scanning: Identifying early signs of environmental changes and trends. 

• Monitoring: Detecting meaning though ongoing observations of environmental changes and trends. 

• Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends. 

• Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management. 

Industry Environment: The Five Forces Model  

- Set of factors that influences a company and its competitive actions and responses  

1. Risk of entry by potential competitors; product differentiation, economies of scale, switching costs, government regulation and large capital requirement  

2. Bargaining power of buyers; Buyers are most powerful with respect to firms in a focal industry when:  

• There are many small firms in the focal industry and a few large buyers,  

• Buyers purchase in large quantities,  

• Buyers can switch sellers at low cost,  

• Buyers purchase from multiple sellers at once,  

• The product is undifferentiated or standardized as such buyers can easily vertically integrate into the focal industry. 

3. Bargaining power of suppliers; Suppliers have bargaining power relative to firms in the focal industry when:  

• supplier industry is dominated by a few large companies,  

• Their products are critical to the success of firms in the focal industry (no suitable substitutes), 

• The focal industry is not a large customer to the supplying industry,  

• It is difficult to switch suppliers because they make a differentiated product or rather product is critical to buyer’s marketplace success,  

• Suppliers can vertically integrate forward, but firms in the focal industry can’t integrate backward to supply their own needs. 

4. Threat of substitute products; The competitive threat of substitute products increases as they come closer to serving similar customer needs. Strongest when: 

• customers face few switching costs; 

• substitute product’s price is lower; 

• substitute product’s quality and performance capabilities are equal to or greater than those of the competing product. 

5. Rivalry among established firms 

• Intensity of rivalry is stronger when:  

• Competitors are numerous or equally balanced 

• Slow industry growth 

• Competitors have high fixed costs or high storage costs 

• Little differentiation / low switching costs 

• Differentiated products that satisfy the needs of customers are often purchased loyally over time.  

• High strategic stakes 

• High exit barriers E.g., sunk costs (special assets linked to business); E.g., Severance costs (labor agreements); E.g., mutual dependence between business and other parts of company. 

Interpreting industry analyses – Attractive Industry/ High profit potential  

• High entry barriers 

• Suppliers and buyers have weak positions  

• Few threats from substitute products  

• moderate rivalry among competitors 

Interpreting industry analyses – Unattractive Industry/ Low profit potential 

• Low entry barriers 

• Suppiers & buyers have strong positions 

• Strong threats from substitute products  

• Intense rivalry among competitors 

Internal analysis  

Answers the question: Why do some firms outperform others in the same industry? 

• Competitive advantage is a firm’s ability to outperform its competitors; 

• The source of competitive advantage is value creation; 

• Sustained competitive advantage leads to higher profits than competitors. 

Business-Level Strategy 

Intergrated and coordinated set of plans ad actions that company uses to gain competitive advantage in a Single product market. Focuses on; customers groups, customers' needs and resources and capabilities  

Types  

1. Cost leadership – producing goods at the lowest cost relative to competitors, too much focus on cost can lead to lack of focus on consumers changing needs and wants  

2. Differentiation – produce goods at an acceptabke cost that customer perceives as /actually unique, creates brand loyalty, customers may not think the product is worth the price  

3. Focused strategy - produce good that serve the needs of a narrow group of the market in exclusion to others, based on low cost or just differentiation, large competitors may set its sights on the firm's niche markets  

4. Intergrated strategy – combination of low cost and differentiation strategy that offers less that truly unique product with relatively low cost, firm may become “stuck in the middle “since the product is neither the lowest cost nor the most differentiated 

Drivers of Competitive Actions and Responses: 

• Awareness; the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity 

•  Motivation; concerns the firm’s incentive to act or to respond to a competitor’s attack depends on perceived gains and losses 

• Ability; Relates to each firm’s resources and flexibility, increased by resource similarity 

Competitive Rivalry;  

• Competitive action / response; a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position / to counter the effects of a competitor’s competitive action 

• Strategic action / response; a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse 

• Tactical action / response; market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse 

Economies of scope; Economies of scope occur when producing a wider variety of goods or services in tandem is more cost-effective for a firm than producing less of a variety, or producing each good independently. 

*Corporate Strategy; selection and management of a group of different business competing in different product markets  

1. Vertical integration; Forward/upstream integration into supplier functions assures consistency with supply and protects against price increases while downstream/backward integration into distributer fuctions assures correct distribution of outputs and captures additional profits beyond activity costs 

• Advantages; creates barrier to entry by denying supply and/or customers, allows investment in highly specific assets to avoid risk, improves responses to change in demand, protects corporations' proprietary information/technology. 

• Disadvantages; sunk costs, increased cost of coordination, communication and control, lack of flexibility in times of changing technology or uncertain demand. 

2. Diversification into businesses that aren’t vertically related  

• Types;  

• Related diversification; Entry into new business activity that shares commonalities with existing businesses in one or more components of the value chain. Market power, transferring core competencies and economics of scopes (sharing activities of resources) are some of the reasons of this type of diversifications  

• Unrelated diversification; Entry into a new business area that has no obvious relationship with any area of the existing business. Restructuring, Efficient internal capital market allocation; reasons of this type of diversification  

• Cost; higher number of businesses can cause diseconomies of scopes, poor coordination among business can cause coordination problems, therefore there extent of diversification must be balanced with its bureaucratic costs 

3. Geographical; strategy where firms sell their goods and services outside its domestic or regional markets.  

• Incentives; New market expansion extends product life cycle, gain access to materials and resources, Integration of operations on a global scale, better use of rapidly developing technologies and international markets yield potential new opportunities. 

• Benefits; increased market size, expanding size/scope of markets helps achieve economies of scale in manufacturing, can spread cost over aa a larger sales base and can lead to increased profit per unit, location advantages can lead to lower cost and higher competitive advantages