Strategic Management Study Guide 2
Strategic Management Study Guide 2 STRT 4500
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This 10 page Study Guide was uploaded by Dominique LaSalle on Tuesday October 4, 2016. The Study Guide belongs to STRT 4500 at University of Colorado Colorado Springs taught by Eric M. Olson in Fall 2016. Since its upload, it has received 32 views. For similar materials see Strategic Management in Business at University of Colorado Colorado Springs.
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Date Created: 10/04/16
Strategic Management Week 3 Competitive Strategy - Business units are any group within a firm that has a defined strategy and manager with both sales and profit responsibility. Typically SBU’s sells groups of related products or services - The essence of competitive strategy is determining how the business unit will compete - The taking of offensive or defensive actions to create a defendable position in an industry to cope successfully with competitive forces and thereby - Typologies o Porter’s Generic Strategy Focus is on competitors Low Cost Leader (overall cost leadership) o relatively high market share or, o access to other advantages o bulding volume through wide product line and/or serving many customer segments o large upfront capital o aggressive pricing o initial loses to build market share o Example: Hyundai Differentiation o Defined as something that is viewed as unique industry wide o May preclude high market share o Requires close relationship with key customers o Requires continual investment and R&D service, or other differential advantage o Margins are typically high but must not become so high as to negate the beneficial advantage o Example: Mercedes Benz Focus o Assumes that a narrow market can be more effectively or efficiently served than by bigger competitors o Requirements: identification of market niche not being adequately addressed Directing firm energies on a particular buyer group, product line segment, or geographic niche Meeting buying criteria of niche (either low cost or differentiation) o Examples: Ferrari (differentiated focus) Yugo (low cost focus) o Stuck in the middle Failure to adhere to one of the three strategies Failure to sustain a strategy Erosion of a strategy due to industry revolution o Miles & Snow Focus on internal capabilities with regard to the development of new products or services Four competitive strategies Prospectors Analyzers Defenders Reactors o Hybrid typologies Walker & Ruekert and Slater & Olson combined Porter’s external focus with Miles and Snow’s internal focus: Prospectors (Apple) Analyzers (Microsoft) Low cost defenders (Motel 6) Differentiated defenders (RitzCarlton) o Treacy and Wiersema Focus on customers buying patterns rather than competitors or product development Operational excellence Objective: to lead the industry in price and convenience by aggressively seeking ways to reduce costs: o Minimize overhead o Eliminate production steps o Reduce transaction costs o Deliver products at competitive price with minimal inconvenience o Examples: Dell computer and Walmart Customer intimacy Objective: to continually tailor products and services to fit an increasingly fine definition of the customer o Expensive to implement but builds longterm customer loyalty o Focus on customer’s lifetime value o Employees receptive to customer requests o Examples Nordstrom’s Broadmoor Hotel/Resort Product leadership Objective: to strive to produce continuous stateoftheart products and services o Embrace new ideas that may originate outside of the company o Quickly commercialize new ideas o Aggressively pursue new solutions o Examples: Hewlett Packard 3M Rubbermaid Apple Brand champion Objective: to strive to build brand equity across massmarkets o Heavy promotion of brands to build brand equity o Identify segments with sufficient numbers or profit potential o develop products to reach a wide audience o price premiums based on perceived quality o example: Nike Sustaining the lead Choose a value discipline that capitalizes on the firm’s capabilities and culture while considering Strategic Management Week 5 Notes The strategic analysis of vertical integration - Vertical integration can be considered in two dimensions - Forward v. backward along the distribution channel - Make vs. Buy Decisions o Typically made on a cost analysis o Porter argues that make vs. buy decisions should be based at least in part on the strategic implications and the administrative complexity (hard to quantify) - Volume of Throughput vs. Efficient Scale o If the firm’s needs do not exceed the scale of an efficient unit, the firm must either Build inefficient small facilities or, Build large efficient facilities and try to sell excess product on the open market o Firms in different parts of the distribution chain seldom have the same efficient scale requirements o Scale efficiencies frequently change due to a wide variety of economic criteria o These criteria may not affect all firms equally - Strategic Benefits of Vertical Integration o Economies of integration o Economies of combined operations o Economies of internal control and coordination o Economies of information o Economies of avoiding the market o Economies of stable relations o Tap into technology o Assure supply and/or demand o Offset bargaining power o Enhanced ability to differentiate o Elevate entry and mobility barriers o Enter a higher return business o Defend against foreclosure - Strategic costs of Integration o Cost of overcoming mobility barriers o Increased operation leverage o Reduced flexibility to change partners o Higher overall exit barriers o Capital investment requirements o Foreclosure of access to supplier or consumer research and/or know how o Maintaining balance o Dulled incentives o Differing managerial requirements (transfer pricing issues) - Issues in Forward Vertical Integration o Improved ability to differentiate product o Access to distribution channels o Better access to market information o Higher price realization - Issues in Backward Vertical Integration o Proprietary knowledge o Differentiation - Alternatives to Vertical Integration o Longterm contracts and the economics of integration When Vertical Integration risks are great, longterm contracting may be a superior way to achieve some of the benefits of Vertical Integration o Tapered integration Partial forward or backward vertical integration Fewer fixed costs Less risk Some access to outside R&D Give knowledge on how to operate in a new industry Firm may have to sell to competitors May actually increase coordination costs o QuasiIntegration Somewhere between longterm contracts and full ownership Minority equity investment Loans or loan guarantees Prepurchase credits Exclusive dealing agreement Specialized logistics facilities Cooperative R&D - Illusions in Vertical Integration Decisions o A strong market position in one stage can automatically be extended to the other o It is always cheaper to do things internally o It often makes sense to integrate into a competitive business o Vertical Integration can save a strategically sick business o Experience in one part of the vertical chain automatically qualifies managers to directupstream of downstream units The Core Competence of the Corporation “Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.” - 3 Tests to Identify Core Competencies o Does the competency provide access to a wide variety of markets? o Does it make a significant contribution to the perceived customer benefits of the end product? o Is it difficult for competitors to imitate? - Limitations o Few companies will be able to develop more than 5 or 6 core competencies that pass these tests - Core products o Core products are links between core technologies and end products o To sustain leadership in a chosen core competence area firms seek to maximize their world manufacturing share of core products - Core Technologies o core technologies are the basic technologies employed in core products that make them distinctive and hard to imitate - End products o End products are the actual products purchased by consumers. They are comprised of various components including core products - Managerial Questions o How long could we preserve our competitiveness in this business if we did not control this particular core competence? o How central is the core competence to perceived customer benefits? o What future opportunities would be foreclosed if we were to lose this particular core competence? - Two Managerial Lessons o The cost of losing a core competence can only partially be calculated in advance o Because the development of core competencies may take a decade or longer, companies that fail to continuously improve and enhance product/technologies may find themselves unable to enter attractive new markets unless simply as a distributor The Value Chain Week 6 Notes - The value chain is a system of interdependent activities conectd by linkages - These connections require that activities be coordinated and tradeoffs be made - A company’s activities can be divided into technologically and economically distinct activities it performs to do business - Value Activities o Primary Inbound logistics Operations Outbound logistics Marketing and sales Service o Support Firm infrastructure Human resources management Technology development Procurement - Value system o Ultimately competitive advantage in either cost or differentiation is a function of a company’s value chain o Firms often differ in their competitive scope when trying to achieve competitive advantage Segment scope (number of P/M segments) Vertical scope (vertical integration) Geographic scope (geographic markets) Industry scope (range of industries) - Transforming the Value Chain o Every value activity has both physical and an informationprocessing component o Every value activities both uses and creates information of some kind - The role of Information of Technology o In the past, information technology was used primarily for accounting and record keeping functions o Now, Information Technology is spreading through the value chain and is performing optimization and control functions as well as more judgmental executive functions - The IT Problem o How to deal with all of the information that is being created? In order to enhance the productivity within the value chain and value systems - Conclusions o In order to enhance the productivity within the value chain and value systems: Managers must understand information technologies and, IT personnel must understand the business functions they support - 5 Steps to Take Advantage of the Information Revolution 1. Assess the information intensity of products and processes 2. Assess the role of information technology in industry structure 3. Indentify and rank ways in which information technology could create a competitive edge 4. Consider which information technology could create a new businesses 5. Develop a plan to take advantage of information technology - Putting Strategy into Shareholder Value Analysis o Economic Value Added EVA is a company’s net operating profit after taxes and after deducing the cost of capital Cost of capital is the minimum rate of return demanded by lenders and shareholders and varies with the risk level of the company Capital is all the money tied up in things such as heavy equipment, real estate, computers, and working capital (cash, inventories, accounts receivable) When you make more money than your cost of capital you create wealth for you shareholders Shareholders have traditionally demanded 67% higher returns on stocks than government bonds If longterm treasury rates are at 7%, then shareholder cost of equity ranges from 1314% o Shareholder Value Analysis SVA is a technique or set of techniques for analyzing the financial consequences of strategies However, SVA has its detractors: Criticisms of SVA o Operating managers often feel victimized by complexities and restrictive assumptions of SVA o It is easily manipulated o Managers seldom agree on issues of discount rate, planning period, or projected cash flows o Excessive number crunching suppresses strategic thinking o Linking SVA and Strategic Thinking Competitive Advantage: outperforming competitors in terms of cost, technology, service, raw material acquisition (sustainable) Value Creation: shareholder value is increased when the company earns more than its cost of capital Sound Strategy: Creates Both! o Separate but Complimentary Concepts Strategy Analysis: establishing superior value in the eyes of the customer or achieving the lowest delivered costs SVA: maximizing returns to shareholders o Reasons why SVA is sometimes an untrustworthy measure of a strategy’s potential Undervaluing a strategy Two types of investment strategies that are often undervalued: o Investing in future options The option of making future investments if the technology takes off The ability to learn Failure to invest may preclude the company from entering that market Options are intangible assets that can account for a large protion of a firm’s assets Discounted cash flow procedures don’t recognize that value and underestimate the attractiveness of new growth areas Why? No projected cash flows However, the market recognizes the value of future growth options (Growth Stocks) Unnecessarily high risk hurdles exacerbate the problem of undervaluation (HP 35%) o Investing to hold customers SVA falls short in measuring the value of keeping customers It is harder to document the damage to competitive advantage from not investing than the savings from not making an investment Overvaluing a strategy Good forecasting is very important and very difficult Numbers, whether good or bad, tend to become accepted as gospel Forecasters are often overly optimistic: o Managers fail to anticipate: Competitors countermoves Customers resisting new offerings Delays in production Extra costs Past trends tend to dominate over future assessments However, excess capacity floods the market with products or new technology reduces competitors’ costs People are also inclined to withhold information to protect their own interests Overlooking a strategy Reasons why the best strategies are not adopted: o Managers already committed to a strategy that suits their needs or fits their assumptions o Because business as usual promises to deliver acceptable performance o Because they don’t want to push themselves (straw man arguments to maintain the status quo) Sometimes alternative strategies become implausible due to game playing in spread sheets: o Market growth improved o Gross margins improved o Working capital cut Result: fantasy adopted as true or probable o Successfully linking SVA to Strategic Analysis Include more options in your strategic analysis process Find solid evidence that a strategy will outperform the competition Scrutinize the validity of underlying assumptions Candor is essential Management should then assess the vulnerability of each strategy What will happen to key results if: important assertions are wrong Critical tasks are not accomplished Program schedules slip badly Does the organization have the necessary skills and resources to implement the alternative strategy successfully? If not, is there enough time and money to develop them? Used correctly, Shareholder Value Analysis is much more like an examination of the strategic fundamentals than a number crunching exercise SVA should be the last step in a rigorous evaluation of how strategic alternatives are likely to fare in the marketplace
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