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Business Strategy Midterm Study Guide

by: Kelly Cosgrove

Business Strategy Midterm Study Guide GEB 4890

Marketplace > Florida Gulf Coast University > Business > GEB 4890 > Business Strategy Midterm Study Guide
Kelly Cosgrove
GPA 3.95

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This study guide covers the topics covered in the first half of the class.
Strategic Mgmt/Decision Making
Study Guide
business, strategy, positioning, SWAT
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This 22 page Study Guide was uploaded by Kelly Cosgrove on Monday August 15, 2016. The Study Guide belongs to GEB 4890 at Florida Gulf Coast University taught by Rottig in Fall 2016. Since its upload, it has received 24 views. For similar materials see Strategic Mgmt/Decision Making in Business at Florida Gulf Coast University.


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Date Created: 08/15/16
Business Strategy Midterm  Strategy  The set of actions that managers take to outperform the company’s competitors and achieve superior profitability  The dynamic positioning of an organization for a competitive advantage with the goal of having long-term, sustainable, superior performance  How to attract and please customers  How to compete against rivals  How to position the company in the marketplace and capitalize on attractive opportunities to grow the business  How to respond to changing economic and market conditions  How to manage each functional piece of the business  How to achieve the company’s performance targets  Why do some company’s fail while others are successful?  Deliberate Strategy: proactive strategy elements that are planned  Emergent Strategy: reactive elements that emerge as change conditions warrant  Strategy Making, Strategy Executing Process  Developing a strategic vision, mission, and core values  Setting objectives  Crafting a strategy to achieve the objectives and the company vision  Executing the strategy  Monitoring developments, evaluating performance, and initiating corrective adjustments  Strategic Plan: lays out its future direction, performance targets, and strategy  Strategic Vision: describes “where we are going” – management’s aspirations for the company and the course and direction charted to achieve them  Strategic Vision: portrays a company’s aspirations for the future (“where we are going”)  Mission: describes the scope and purpose of its present business (“who we are, what we do, and why we are here”)  Values: the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company’s business and pursuing its strategic vision and mission  Objectives: an organization’s performance targets- the specific results management wants to achieve  Stretch objectives: set performance targets high enough to stretch an organization to perform at its fill potential and deliver the best possible results  Financial objectives: relate to the financial performance targets management has established for the organization to achieve  Strategic Objectives: relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects  External Analysis  The external environment has three major areas: industry, competitor, and general  General Environment  Affects the firms performance and survival but cannot be directly controlled by individual firms  Consists of 6 major areas (PESTEL)  Economic: inflation rates, interest rates, money supply, GDP, unemployment rates, disposable income etc.  Political/Legal: antitrust laws, taxation laws, labor training laws, wage/price controls, foreign trade regulation, stability of government etc.  Technological: product innovation, life cycle and imitation, applications of knowledge, new communications technologies, government spending in R&D etc.  Demographic: population size and growth, age structure, ethnic mix, income distribution, urbanization etc.  Sociocultural: workforce diversity, women in the workforce, career expectations, concerns about the environment, importance of family etc.  Global: globalization  Two tools for analyzing the general environment: SWOT and SMFA  SWOT  Only opportunities and threats are part of the external environment  SMFA (plane example)  Scanning: identification of early signals of environmental changes and trends  Monitoring: identification of important trends through ongoing observation of environmental changes  Forecasting: projection of anticipated outcomes based on monitored environmental changes  Assessing: determination of timing and significance of the effects of environmental changes on the strategic management of a firm  Industry Environment  An industry can be defined in terms of products/services and geographic scope  Must ask 6 questions regarding the industry environment  Does the industry offer attractive opportunities for growth?  Growth does not guarantee profitability  Market size and industry growth rate are key economic indicators of an industry’s growth prospects  How strong are the industry’s competitive forces?  Main sources of competitive forces and the strength of these forces  To answer this question, you should use Porter’s Five Forces Model to assess profitability  Threat of New Entrants  Entry barriers are high and threat of new entrants is low when:  Incumbents have large cost advantages over potential entrants due to:  High economies of scale  Significant experience-based cost advantages or learning curve effects  Other cost advantages such as favorable access to inputs, technology, location, or low fixed costs  Customers have strong brand preferences and loyalty to incumbent sellers  Patents and other forms of intellectual property protection are in place  There are strong network effects  Capital requirements are high  There is limited new access to distribution channels and shelf space  Government policies are restrictive  There are restrictive trade policies  Rivalry Among Existing Competitors  Rivalry is stronger when:  Buyer demand is growing slowly  Buyer costs to switch brands are low  The products of industry members are commodities or else weakly differentiated  The firms in the industry have excess production capacity and/or inventory  The firms in the industry have high fixed costs or high storage costs  Competitors are numerous or are of roughly equal size and competitive strength  Rivals have diverse objectives, strategies, and/or countries of origin  Rivals have emotional stakes in the business or face high exit barriers  Ways to Compete with Rivals  Discounting Prices, holding clearance sales  Offering coupons, advertising items on sale  Advertising product or service characteristics, using ads to enhance a company’s image  Innovating to improve product performance and quality  Introducing new or improved features, increasing the number of styles to provide greater product selection  Increasing customization of product or service  Building a bigger, better dealer network  Improving warranties, offering low-interest financing  Bargaining Power of Buyers  Bargaining power of buyers is stronger when:  Buyer demand is weak in relation to industry supply  The industry’s products are standardized or undifferentiated  Buyer costs of switching to competing products are low  Buyers are large and few in number relative to the number of industry sellers  Buyers pose a credible threat of integrating backwards into the business of sellers  Buyers are well informed about the quality, prices, and costs of sellers  Buyers have the ability to postpone purchases  Buyers are price-sensitive and increase competitive pressures when:  Buyers earn low profits or low income  The product represents a significant fraction of their purchases  Threat of Substitutes  Competitive pressures from substitutes are stronger when:  Good substitutes are readily available and attractively priced  Substitutes have comparable or better performance features  Buyers have low costs in switching to substitutes  Signs that competition from substitutes is strong:  Sales of substitutes are growing faster than sales of the industry being analyzed  Producers of substitutes are moving to add new capacity  Profits of the producers of substitutes are on the rise  Bargaining Power of Suppliers  Supplier bargaining power is strong when:  Suppliers’ products are in short supply  Suppliers’ products are differentiated  Industry members incur high costs in switching their purchases to alternative suppliers  The supplier industry is more concentrated than the industry it sells to and is dominated by a few large companies  Industry members do not have the potential to integrate backward in order to self-manufacture their own inputs  Suppliers’ products do not account for more than a small fraction of the total costs of the industry’s products  There are no good substitutes for what the suppliers provide  Industry members do not account for a big fraction of suppliers’ sales  Weak forces mean profitability is high and strong forces mean profitability is low  What forces are driving change in the industry?  Industries change because forces are driving industry participants to alter their actions  Driving forces can come from the general environment (shift in societal values, changes in government regulations etc.) or from the industry and competitor environments (shifts in industry product life cycle, new international competitors etc.)  Common types of driving forces include changes in long-term industry growth rate, increasing globalization, emerging internet capabilities, product innovation, marketing innovation, diffusion of technical knowledge, entry or exit of major firms, changes in degree of uncertainty and risk, consumer preferences etc.  Three steps to analyzing driving forces  Identify forces likely to exert greatest influence over next 1-3 years  Assess impact of driving forces  Are they acting to cause market demand to increase or decrease?  Are they acting to make competition more or less intense?  Will they lead to higher or lower industry profitability  Determine what strategy changes are needed to prepare for the impacts of driving forces  What market positions do rivals occupy? What moves will they make next?  Strategic group: a cluster of firms in an industry with similar competitive approaches and market positions  Have two or more common characteristics:  Comparable product line breadth  Sell in same price/quality range  Emphasize same distribution channels  Use same product attributes to appeal to similar buyers  Use identical technological approaches  Offer buyers similar services  Cover same geographic areas  Strategic Mapping  Identify competitive characteristics that differentiate firms  Plot on a two-variable map using pairs of these differentiating characteristics  Axis variables should not be highly correlated and should expose big differences in how rival compete  Variables do not have to be quantitative or continuous  Assign firms that fall in about the same strategy space to the same strategic group  Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales  The closer the groups are on the map, the stronger cross- group competitive rivalry is  Drawing sizes of circles proportional to combined sales allows map to reflect relative sizes of each strategic group  Not all positions on the map are equally attractive  Competitor Analysis  Forecasting Next Likely Strategic Move  Which rivals have incentive and resources to make major strategic changes  Which rivals need to increase unit sales and market share and what strategies are they likely to pursue  Which rivals are good candidates to be acquired and which have the resources to acquire others  Which rivals are likely to enter new geographic markets  Which rivals are likely to expand their product offerings and enter new product segments  Competitor Roles  Market Leader – 40% market share  Focus on expanding total demand  Defend market share  May not wish to aggressively take market share from competitors  Ex. Coca Cola  Market Challenger – 30% market share  Concentrate on the leader as a target  Market Follower – 20%  Use modest strategic objectives  Use innovative imitation  Compete in selective few segments or with more limited product offering  Market Nicher – 10% market share  Use modest strategic objectives  Focus on narrow slice of the market by concentrating on specific segments  What are the key factors for competitive success?  Key success factors are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful  Make the difference between profit and loss and between competitive success of failure  Can relate to specific strategy elements, product attributes, resources, competencies, competitive capabilities, and market achievements  To identify key success factors  On what basis do customers choose between competing brands?  What resources and competitive capabilities does a company need to have to be competitively successful?  What shortcomings are likely to place a company at a significant competitive disadvantage?  How attractive is the industry from a profit perspective?  Assessing whether the industry and competitive environment presents a company with an attractive or unattractive opportunity for earning good profits  The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a company’s ability to capture them.  Sources of External Information  Primary  Customer surveys  Market research  Presentations at industry and academic conventions  Shareholder meetings and conversations with shareholders  TV programs  Interviews  Secondary  Company and industry reports  Business press and periodicals  Academic journals  Government documents  Books  Directories  Internet  Internal Analysis  First identify how well the company’s present strategy is working  Ask:  Current generic strategic positioning  Competitive scope  Recent strategic moves  Key Indicators  Trend in sales and market share  Acquiring and/or retaining customers  Trend in profit margins  Trend in net profits, EPS, and ROE  Overall financial strength and credit rating  Efforts at continuous improvement activities  Trend in stock price  Image and reputation with customers  Leadership roles – technology, product quality, innovation  Resources, capabilities, and core competencies are the foundation of an organization’s competitive advantage; distinct competencies are the source of an organization’s competitive advantage  Resources: comprised of individual, social, and organizational assets  Tangible – things you can count or touch  Financial: borrowing capacity and ability to generate internal funds  Organizational: formal reporting structure, formal planning, controlling, and coordination systems  Physical: sophistication and location of plants and equipment, access to raw materials  Technological: stock of technology such as patents, trademarks, copyrights, and trade secrets  Intangible  Human: knowledge, trust, managerial capabilities, organizational routines  Innovation: ideas, scientific capabilities, knowledge, capability to innovate  Reputational: reputation with customers, brand name, perceptions of product quality, durability and reliability, reputation with suppliers, efficient, effective, supportive, and mutually beneficial relationships and interactions  Capabilities: resources alone do not yield a competitive advantage, but unique bundling of several resources may. Bundling of resources creates organizational capabilities  Capabilities exist when resources have been purposefully integrated to achieve a specific task or set of tasks, such as human resource selection, product marketing, research and development, etc.  Capabilities:  Are often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital  Often evolve and develop over time  Foundation of many capabilities lies in the unique skills and knowledge of a firm’s employees and their unique functional expertise  Are often developed in specific functional areas  Core Competency: the capabilities a firm does best among all its capabilities  Distinctive Competency: core competencies that meet the VRIO criteria become a distinctive competency and are the source of competitive advantage  VRIO: economic theory suggests that firm performance is a function of the types of resources and capabilities controlled by firms  Valuability: only value-adding resources can possibly lead to competitive advantage  Rarity: only valuable and rare resources and capabilities have the potential to provide some temporary competitive advantage  Imitability: source of sustainable competitive advantage only if competitors have a difficult time imitating them  Organizational Embeddedness: formal and informal organizational structure to develop and leverage the full potential of a firm’s resources and capabilities  Resource Based View  Sources of Costly Imitation  Unique historical conditions  Casual ambiguity  Social complexity  Ex. Brand loyalty  Patents  Dynamic Capabilities View  Dynamic capability is the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments  Value Chain Analysis: a tool that allows firms to better understand those business processes that create value (core competencies) and those that do not (core rigidities). Value chain analysis facilitates the identification of a firm’s distinctive competencies and distinguishes those activities that drive sustainable competitive advantage.  No firm does all five primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) better than competitors. Companies should focus on the one that is their core competency and outsource the rest, but never outsource your core competency.  Activity based cost accounting identifies costs based on expense categories for specific value chain activities and assigns costs to the activity responsible for creating the cost, This allows a company to identify processes and what resources and components go to each process.  Putting it all together: external and internal analysis  SWOT: looking inside for strengths and weaknesses and looking outside for opportunities and threats.  TOWS  Strengths and Opportunities  Areas to leverage  Maxi-maxi strategy: use strengths to maximize opportunities  Strengths and Threats  Problems  Maxi-mini strategy: use strengths to minimize threats  Weaknesses and Opportunities  Chances lost  Mini-maxi strategy: minimize weaknesses by taking advantage of opportunities  Weaknesses and Threats  Vulnerabilities  Mini-mini strategy: minimize weaknesses to avoid threats  Generic Competitive Strategic Positioning  Corporate Level: where do we compete  How to gain advantage from managing a set of businesses  Functional Level: how do we organize to compete  How to manage a particular activity within a business in ways that support the business strategy  Business Level: how do we compete  How to gain and sustain a competitive advantage for a single line of business  A generic strategic positioning is the beginning of strategy, not strategy itself  Economic Logic: how you make money  Low-cost leadership  Decreasing unit costs and becoming more efficient  Key risk is technological advancement  Differentiation  Key risk is imitation  Combat this risk with psychological value added  Competitive Scope  Who is your customer?  broad vs. narrow  Integrated position: best-cost provider vs. stuck in the middle  Porter’s Five Generic Strategic Positioning  Low Cost Leadership (Walmart): achieving a cost-based advantage over rivals  Characteristics of Low Cost Leadership  Exploits opportunities for cost reduction through economies of scale and experience effects in purchasing and manufacturing  Minimizes expenditures on R&D, marketing, and overhead  Uses competitive pricing strategy to deal with rivals  Low prices serve as entry barrier to potential competitors  Aims for substantial share of the market by appealing primarily to budget-sensitive customers  Translating Low-Cost Advantage into Profits  Use lower-cost edge to underprice competitors and attract price- sensitive buyers in enough numbers to increase total profits  Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold  Approaches to Securing Cost Advantage  Do a better job than rivals of performing value chain activities efficiently and cost effectively  Capture scale economies, avoid scale diseconomies  Capture learning and experience curve effects  Try to operate manufacturing facilities at full capacity  Improve supply chain efficiency  Substitute low-cost raw materials for high-cost raw materials  Adopt labor-saving operating methods  Use outsourcing and vertical integration  Revamp value chain to bypass cost-producing activities that add little value from the buyer’s perspective  Make greater use of faster and cheaper online technology applications  Use direct-to-end-user sales  Streamline operations by eliminating low-value-added or unnecessary work steps  Offer basic, no-frills products  Offer a limited product/service  Differentiation (Coke): seeking to differentiate the company’s product or service from that of rivals in ways that will appeal to a broad spectrum of buyers  Objective: incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals  Keys to Success  Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals  Keeping the cost of achieving differentiation below the higher price that can be charged  Characteristics  Concerns itself with value added  Primary objective is to redefine the rules by which customers arrive at their purchase decisions by offering something unique that is valuable  Aims at broad, mass market and seeks to create uniqueness on an industry-wide basis  Varies by: design/brand image, technology, customer service, distribution, features, or a combination of these elements  Importance of Perceived Value  Buyers seldom pay for value that is not perceived  Price premium of a differentiation strategy reflects value actually delivered and value perceived  Value can be judged based on signals such as:  Price  Attractive packaging  Extensive ad campaign  Ad content and image  Seller facilities or professionalism and personality of employees  Having a list of prestigious customers  These signals are just as important as actual value when:  Nature of differentiation is hard to quantify  Buyers are making first time purchases  Repurchase is infrequent  Buyers are unsophisticated  Pitfalls  Buyers see little value in unique attributes of a product  Overspending on efforts to differentiate the product offering, thus eroding profitability  Over-differentiating such that product features exceed buyers’ needs  Charging a price premium buyers perceive too high  Not striving to open up meaningful gaps in quality, service, or performance features  Focused Low Cost Leadership (Dollar Store): concentrating on a narrow buyer segment and outcompeting rivals buy having lower costs and thus being able to serve niche members at a lower price  Characteristics of Focused Low Cost Leadership  Aims at more narrow scope than general cost leadership  Focuses on small, well-defined market niche, such as a particular group of customers or geographic regions that is selected to the exclusion of others  Undertakes only activities directly relevant to serving market niche  Risks  Technological change may nullify past investments or learning  Low-cost learning by newcomers may create potential competitive threat  Inability to see product, marketing, or buyer preference changes because of becoming too fixated on cost focus  Overly aggressive price cutting resulting in lower profitability  Focused Differentiation (Porsche): concentrating on a narrow buyer segment and outcompeting rivals by offering buyers customized attributes that meet their specialized needs and tastes better than rivals’ products  Aims at a well-defined segment of the market and key customers should be willing to pay for value added  Keys to Success  Combine multiple sources of differentiation  Integrate different dimensions of value added  Make explicit decisions about how much value to ass, where to add such value, and how to communicate such added value to the customer  The biggest challenge of this strategy is imitation. Imitation narrows actual and perceived differentiation and may change customers’ minds about what constitutes differentiation, and so change their loyalties and preferences  Best-Cost (Lexus): giving customers more value for the money by satisfying their expectations on key quality features, performance, and/or service attributes while beating their price expectations  Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation  Make an upscale product at a lower cost  Give customers more value for the money  Objectives  Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations  Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands  Competitive Strength  Competitive advantage is based on the capability to include upscale attributes at a lower cost than rivals’ comparable products  A company must be able to:  Incorporate attractive features at a lower cost than rivals  Manufacture a good-to-excellent quality product at a lower cost than rivals  Develop a product that delivers good-to-excellent performance at a lower cost than rivals  Provide attractive customer service at a lower cost than rivals  Risks:  May get squeezed between strategies of firms using low-cost and differentiation  Low-cost leaders may be able to siphon customers away with a lower price  High-end differentiators may be able to steal customers away with better product qualities  Generic Strategy in International Markets  Multidomestic Strategic Positioning  Think global, act local  Firms operating subsidiaries in several countries, and strategy for each subsidiary varies across countries depending on local buyer preferences and market conditions  Global Strategic Positioning  Think global, act global  Firms operating subsidiaries in several countries, and strategy for each subsidiary in each country is consistent  Business-level (Competitive) Strategy  Mergers & Acquisitions  Acquisition: a firm buys a stake in another firm with the intent of gaining an extent of control in the acquired firm  Ex: company A acquires company B  company A is now larger and company B no longer exists  Merger: two firms agree to integrate their operations on a relatively coequal basis  Ex: company A and company B merge  both companies cease to exist and now there is a new company M  Types of Ownership  Portfolio Investment  Purchase < 5% and trust incumbent management to make decisions  Minority Acquisition  Acquire >5% and <50% of outstanding stock in a publicly traded company  Majority Acquisition  Acquiring >50% of a company’s stock and having a veto vote  Outright Acquisition  Purchasing all shares/assets to become the owner  Terminology  Acquisition Premium: different between the price a potential acquirer offers to pay for a target and the current market price of the target firm’s shares  Having a premium implies an acquisition and not a merger  Friendly Acquisition: occurs when the management of target firm wants the firm to be acquired and cooperates with the acquirer  Hostile Acquisition: occurs when the management of the target firm does not want the firm to be acquired and does not cooperate  Market Capitalization: number of shares x stock price  Types of Mergers and Acquisitions  Horizontal: acquisition of a firm competing in the same industry  Ex: United and Continental  Vertical: acquisition of a firm that is a supplier or distributor  Ex: Google and Double Click  Domestic: acquirer and target are headquartered in the same country  Ex: Disney and Marvel  International: acquirer and target are head-quartered in different countries  Ex: Walmart and Inter Spar  Motives for Mergers and Acquisitions  Synergy (economies of scope), create more cost efficient options  Increase market power (economies of scale, reaching the critical mass, becoming “too big to fail”)  Overcoming entry barriers (acquisition of an existing competitor)  Cost of new product development and increase speed to market  Gain access to new technologies, competitive capabilities and capable personnel  Expand a firm’s geographic coverage and enter international markets  Other reasons (tax motives, protection of markets)  Failure rates for mergers and acquisitions are between 50% and 83%  Strategic Alliances  A strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage  A formal agreement between two or more separate companies where there is  Strategically relevant collaboration of some sort  Joint contribution of resources  Shared risk  Shared control  Mutual dependence  Alliances often involve  Joint marketing  Joint sales or distribution  Joint production  Design collaboration  Joint research  Projects to jointly develop new technologies or products  Types of Strategic Alliances  Equity-based alliance  Joint Venture: two or more firms create a legally independent firm to share some of their resources and capabilities to develop a competitive advantage  Ex: Company A and company B form company JV, a joint venture, but company A and company B still exist independently  Cross-Shareholdings: two or more firms own shares in each other to create a competitive advantage  Ex: Company A owns stock in company B and company B owns stock in company A  Non-equity Based Alliance: two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage  Horizontal: partnerships between firms in the same industry  Vertical: partnership of a firm with one or more of its suppliers or customers  Domestic: partnership between firms from the same country  International: partnerships between firms from different countries  Complementary Strategic Alliance: business-level alliance in which firms share some resources and capabilities in matching/fitting ways to develop competitive advantages  Same rival and same industry  Competitors form agreements to fight larger rivals by sharing resources and capabilities to gain competitive advantage  Competition Response Strategy: strategic alliances whose purpose is to respond to competitors’ attacks  Different rival and different industry  Related companies form agreements to fight different company rivals  Ex: France Telecom and Microsoft formed to compete against BT group  Uncertainty-reducing Strategy: strategic alliances whose purpose is to hedge risk and uncertainty, especially in fast-cycle markets  Non-related industry companies combining to fight an outside uncertainty  Ex: the fuel company and the food company formed an alliance to fight uncertainty about the availability of fossil fuels  Network Strategic Alliance: strategy wherein several firms agree to form multiple alliances/partnerships to achieve shared objectives  More than one alliance partner to stay competitive  Keeps your partners away from competitors  The failure rate for alliances is between 37% and 70%  One or more partner did not achieve its objectives  One partner benefited while the other partner is left worse off competitively  Opportunistic behavior by partners and lack of trust  Alliances are sometimes considered substitutes for acquisitions  Vertical Integration  Extends a firm’s competitive scope within the same industry  Vertical integration can be full (outright acquisition) or partial (minority acquisition, strategic alliance)  Types  Backwards: into sources of supply  Generates cost savings if volume needed is big enough to capture efficiencies of suppliers  Potential to reduce costs exists when suppliers have sizable profit margins, item supplied is a major cost factor, or resource requirements are easily met  Can produce a differentiation-based competitive advantage when it results in a better quality part  Reduces risk of depending on suppliers of crucial raw materials/components  Forwards: toward users of products  To gain better access to end users and better market visibility  To bypass regular distribution channels in favor of direct and internet sales can lower distribution costs, produce a relative cost advantage, and enable lower selling prices  To compensate for undependable distribution channels which undermine steady operations  To offset lack of a broad product line, a firm may sell directly to end users  Disadvantages  Boosts resource requirements  Locks firm deeper into same industry  Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety  Poses all types of capacity-matching problems  May require radically different skills/capabilities  Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products  Outsourcing  Involves having outsiders perform certain value chain activities rather than performing them in-house  Reasons to Outsource  Specialization (comparative advantage): outsiders can often perform certain activities better or cheaper  Hedgehog capabilities: allows a firm to focus its entire resources on hedgehog activities (its distinct or core capabilities)  Advantages  Activity can be performed better or cheaper by outside specialists  Activity is not crucial to achieve a sustainable competitive advantage  Risk exposure to changing technology and/or buyer preferences is reduced  It improves firm’s ability to innovate  Operations are streamlined to improve flexibility or cut time to get new products into the market  It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently  Firm can concentrate on “core” value chain activities that best suit its resource strengths  Disadvantages  Outsourcing too many activities or the wrong activities may lead to:  Hallowing out capabilities and so lose touch with activities and expertise that determine overall long-term success  Reveal competitive advantage when outsourcing distinct competencies  Timing Strategic Moves  First Mover Advantages  Pioneering helps build a firm’s image and reputation  Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage  Loyalty of first time buyers is high  Moving first can be a preemptive strike  Late Mover Advantages  Innovator’s products are primitive, not living up to buyer expectations  When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to first mover  Demand side of the market is skeptical about the benefits of new technology/product of a first-mover  Rapid technological change allows followers to leapfrog pioneers  Blue Ocean Strategy  First mover approach that seeks to gain a dramatic, durable competitive advantage by  Abandoning efforts to beat out competitors in existing markets and  Inventing a new industry or distinctive market segment to render existing competitors largely irrelevant and  Allowing a company to create and capture altogether new demand  Blue Ocean Market Space  Industry does not exist yet  Industry is untainted by competition  Industry offers wide-open opportunities if a firm has a product and strategy allowing it to create new demand and avoid fighting over existing demand  Business Strategy Quiz 1  The market for private-label athletic footwear is projected to grow 10% annually in all four geographic regions during the Year11-year 15 period and 8.5% annually in all four regions during the year 16-year20 period  Going into Year 11, the company’s production capability is 6 million pairs without the use of overtime and 7.2 million pairs with the use of overtime  The reject rates at the company’s footwear plants are a function of the size of the incentive payment per non-defective pair produced, spending for best practices training, spending from TQM/Six Sigma quality control, the number of models/styles compromising the company’s product line, and the installation of plant upgrade option A  The factors that affect worker productivity include the size of incentive payments per non-defective pair, base pay increases, how favorably a company’s compensation package compares with the industry-average compensation package, and expenditures for best practices training  The company’s performance is judged/scored based on earning per share, ROE, stock price, credit rating, and image rating  The market for branded athletic footwear is projected to grow 9-11% annually in LA and Asia from year 11 to year 15 and 5-7% annually in NA and Europe from year 11 to year 15  The company’s bid price is the most important factor in determining a company’s unit sales and market share of private-label footwear in a region  In year 11, companies can expect to sell an average of 4.84 million branded pairs and an average of 800,000 private-label pairs, although sales at some companies may run higher or lower than the averages due to differing levels of competitive effort  The company’s shipments of newly-produced branded and private-label footwear from its plants to its regional distribution centers are subject to any applicable import tariffs and exchange rate adjustments  How much is spent to inspect newly-produced pairs and avoid shipping defective shoes does not affect the S/Q rating  Standard and superior materials are sourced from outside suppliers at prices that vary according to global demand-supply conditions; the company’s production workers are compensated on the basis of both base pay and incentive payments per non-defective paid produced  The interest rate a company pays on loans outstanding depends on its credit rating  The company currently has production facilities to make athletic footwear in NA and Asia  Asia, Europe, LA and Na are the four regions in which the company sells  The length of warranties is not a factor in determining a company’s unit sales and market share  Default-risk ration, debt-asset ratio, and interest coverage ratio determine a company’s credit rating  A footwear-maker’s price competitiveness in selling branded footwear to retailers in a particular geographic region is determined by whether its wholesale price is above or below the average price of all companies competing in that geographic region  The compensation package for production workers is made up of base wages, incentive payments per non defective pair produced, and overtime pay  The company uses standard and superior materials to make its footwear  The currencies involved in affecting operations are U.S. dollars, Singapore dollars, euros, and Brazilians reals  Articles  Five Forces  Threat of New Entrants  Spread an existing market over more companies  Put pressure on prices, costs, and investment needs  Incumbent firms must constantly manage their prices and continue investing in their firm in order to make it harder for new competitors to easily enter the market  Power of Suppliers  Suppliers are able to identify the importance of key relationships and leverage them to increase profits  If a supplier is large enough, they have the power to capture more of the industry profits by lowering quality while demanding higher prices.  Power of Buyers  Can limit the profitability of firms  If there are only a few buyers supplying firms experience pressure to discount their prices in order to maintain increasing levels of volume due to bulk orders from these few customers  If there are lots of suppliers providing similar products, it is very easy for customers to switch between companies. This creates intense price competition and drastically narrows margins of selling firms  Also, if a buyer is large enough, they may have the resources to either vertically integrate or establish their own supplier. Existing suppliers will discount and try to provide additional value in order to maintain existing client relationships  Substitutes  When many substitutes’ products/services exist, firms must distance themselves from substitutes which restricts their ability to raise prices and increases costs  Firms will attempt to maintain market share by raising the switching costs associated with their product and service  Rivalry  Rivalry will be more intense among industry members if the industry is not experiencing high levels of growth.  If there are many competitors of similar sizes rivalry will be fiercer as competitors vie to become the industry leader.  If a firm’s assets are highly specialized and management is dedicated to the firm, many companies will continue to compete instead of exiting the industry, which increases the level of rivalry in the industry overall.  Mintzberg  Plan  Consciously intended course of action  A set of rules used to decide future strategic decisions prior to beginning a strategy  Ploy  Specific maneuver intended to outwit an opponent  Using the rules to create on specific strategy to intimidate competition  Pattern  A stream of actions  When a series of behaviors, not predetermined or conscious, become the strategy  Position  A means of location an organization in an environment  The match between organization and environment  A company’s strategic place in reference to a competitor’s strategic place  Perspective  Ingrained way of perceiving the world  Internal strategic behavior of a company  The company’s personality  Porter  Strategic Decisions: doing something in a different way or doing a completely different activity than the competitions. Strategic decisions allow companies to differentiate themselves, focuses on long term, and considers the organization as a whole. DIFFERENT  Operational Decisions: something that improves the company internally and improves everyday operations. Operational decisions result from strategic decisions. BETTER  Strategic Fit  First-order fit is simple consistency between each activity (function)  Second-order fit occurs when activities are reinforcing  Third-order fit occurs with optimization of effort (reducing redundancy and waste)  Trade-Offs  Occur when activities are incompatible  A trade-off means that more of one thing necessitates less of another  Critical to the sustainability of a strategy. They create the need for choice and purposefully limit what a company offers  Arise for three reasons:  Inconsistencies in image or reputation  Trade-offs arise from activities themselves  Trade-offs arise from limits on internal coordination and control  Can You Say What Your Strategy Is  Edward Jones Example  Components of Strategy Statement  Objective: must begin with a definition of the ends that the strategy is designed to achieve. Should include not only an end point but also a time frame for reaching it.  Scope: the domain of a business, or part of the landscape in which the firm will operate  Advantage: what your business will do differently from or better than others defines the all-important means by which you will achieve your stated objective.  Strategic Sweet Spot: the strategic sweet spot of a company is where it meets customers’ needs in a way that rivals can’t, given the context in which is competes.  Hardball: Killer strategies for Trouncing the Competition  The Hardball Manifesto provides both offensive and defensive strategies for pummeling the competition. The Hardball Manifesto also lists five essential traits of hardball players. These traits are  Relentlessly focusing on competitive advantage  Striving for an “extreme” competitive advantage  Positioning themselves in a position unattainable by competitors  Avoid attacking directly  A direct attack on an opponent must be a last resort, an attack, indirect in nature is one which works best  Exploiting people’s will to win  Knowing the caution zone  The caution zone is the fine line between where society clearly states you can and cannot play the game of business  Does it break any existing laws?  Is the action good for the customer?  Will competitors be directly hurt by it?  Will the action touch a nerve in special-interest groups?  Blue Ocean Strategy  Red Ocean Strategy  Compete in existing market space  Beat the competition  Exploit existing demand  Make the value/cost trade-off  Align the whole system of a company’s activities with its strategic choice of differentiation or low cost  Blue Ocean Strategy  Create uncontested market space  Make the competition irrelevant  Create and capture new demand  Break the value/cost trade-off  Align the whole system of a company’s activities in pursuit of differentiation and low cost


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