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MGMT 371 Chapter 4 Book and Lecture Notes

by: Savannah Baron

MGMT 371 Chapter 4 Book and Lecture Notes MGMT 371 001

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These notes outline chapter 4 as explained by the book and in lecture
Principles of Management
Dr. Danielle Ammeter
Class Notes
Management, Intro to Management, management principles
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This 18 page Class Notes was uploaded by Savannah Baron on Saturday February 13, 2016. The Class Notes belongs to MGMT 371 001 at University of Mississippi taught by Dr. Danielle Ammeter in Winter 2016. Since its upload, it has received 32 views. For similar materials see Principles of Management in Business, management at University of Mississippi.


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Date Created: 02/13/16
Chapter 4—Book Notes I. Intro  Strategy: includes pursuing a set of unique activities that provide value to customers; making tradeoffs about which business to pursue, what products to produce, and which customers to serve; and aligning resources to achieve organizational objectives o Game plan for organization, specifying how the firm attends to achieve its goals  Competitive Advantage: achieved when a form creates more economic value than competitors by engaging in a strategy that is difficult or impossible for others to duplicate o To be sustainable, strategy must be consistent with external environment, aligned with internal capabilities, and dynamic  All successful companies have a well-designed strategy and the formulation of strategy does not come by chance o Strategy is formed after careful assessment of internal and external environments and resources  Challenge is to maintain competitive differentiation from competitors o When there is no differentiation, firms tend to compete based on price, which can erode profitability for an entire industry II. A Brief History of Strategy  Greeks used the term strategy to refer to the leader or general of an army o Term described an individual leader’s ability to marshal a large set of resources  Sun Tzu o “Those who are skilled at executing strategy, bend the strategy of others without conflict, uproot the fortifications of others without attacking, and absorb the organizations of others without prolonged operations.” o Success over an opponent could be achieved using a well- honed strategy without using force o More important to out-think an opponent than to outmaneuver the opponent through physical force o Avoidance of conflict was the essence of success  Roman Empire o Military strategists constructed battle plans based on an assessment of their own forces (internal environment) and the enemy forces and conditions (external environment) o Strategy changed each battle depending on the enemy o Strategy was considered a plan of action designed to achieve a specific goal o Tactics: specific moves or actions armies would perform on the battlefield o Strategy: grand plan for the war, usually aimed at creating military advantage  At its basest level, war and business have much in common o Desire to beat the opponent o Desire to succeed in competition o How an organization attempts to gain a competitive stronghold:  Generating better information than their rivals  Analyzing that information to make strong, informed choices  Quickly selecting among choices  Converting strategic choices into decisive action  Importance of data gathering and analysis o Leaders must understand their competitors and the overall competitive landscape o Early business leaders focused on corporate planning and analysis as the basis of strategy  Conglomeration: when businesses grew through unrelated diversification, essentially by acquiring companies in different industries o Managers turned to corporate planning to make sense of their various business lines o Planning involved the development of detailed forecasts and business-level goals/objectives  Goals were institutionalized through a series of specific action plan steps that were expected to be executed over a defined period (often 3- or 5-year plans that were updated)  In 70’s and 80’s, US firms lost competitive edge to more nimble and flexible international competitors o Many blamed the devotion to corporate planning o Some researchers believed that planning actually decreased a firm’s innovative capabilities because of management’s adherence to rigid formulas  Key to planning is to not only ensure that the plan is robust and well thought out but also is fluid and adaptable o Plans should not sit in the drawers of executives, and they should not be followed by zombie-like mindlessness o Should be a living document that helps managers prepare for potential opportunities and threats o Should constantly be monitored and updated  Today’s firms view strategy as a framework for managers to allocate resources and evaluate activities o Requires a blend of imagination and judgment o Key is to constantly monitor environment and adapt one’s strategy as necessary, which is not always easy III. Strategy and the Organization: A Framework A. The Purpose of Business  What is the business for? Who does is serve and to what purpose?  Goal of a firm can be defined as an organizationally desired result, product, or end state o Goal of a business is to make profits (Friedman) o Business should strive to produce revenues that exceed costs by the widest margin possible o Firm should focus exclusively on this and concern itself only with pleasing and creating value for shareholders or owners within the limits of the law  Despite increasing stakeholder theory of the firm, many still believe that the only purpose of a firm is to make profits for shareholders  More managers are adopting a broader stakeholder approach; the primary goal is to still maximize profits but in an ethical and responsible manner B. Analyzing the Internal and External Environment  Strategy formulation begins by assessing internal and external environments  Manager must identify all components of internal environment: o Goals o Resources o Competencies o Culture  Must explore components of the external environment, with a special emphasis on contextual forces o Industry analysis o Customer Analysis o Supplier Analysis o Competitor Analysis  Depending on business or industry, certain stakeholders have more influence than others o Managers must identify which stakeholders possess the greatest leverage and develop specific approaches to address their needs  Once a manager has examined all factors, he/she can better articulate the firm’s reason for existence and begin to make a series of decisions and construct a system of activities that will enable the firm to deliver on its potential  Ultimate goal is to create a network of activities that strategically fit together and are difficult to replicate  Corporate Competencies: the firm’s network of activities that help establish competitive advantage C. Vision, Mission, and Objectives  Firm must have a clear vision of how it wants to bring value to customers and satisfy various stakeholders to be successful  “A vision articulates a view of a realistic, credible, attractive future for an organization, a condition that is better in some important ways than what now exists.” (Bennis and Nanus)  Vision: concept or picture of what a firm wants to achieve and how it plans to accomplish that o Development of a vision is one of the critical roles for leaders of an organization o Often what motivates individuals to join a firm and perform beyond expectations  Mission of the firm is a definition of what activities the firm performs for its customers o Mission statement defines a firm’s reason for existence, states what activities the firm performs or what markets it’s trying to serve and how it distinguishes itself from competitors o Mission statements provide employees with a sense of the firm’s priorities and serve as a guiding resource to direct a firm’s activities  Effective mission statements can provide the following benefits: o Define the purpose of the company o Build motivation and commitment among employees o Provide direction and inspiration o Serve as a focal point o Assist in making strategic tradeoffs  Mission statements are inspirational and potentially motivating, but lack specific details on how the missions will be accomplished  Objectives: provide a series of quantifiable milestones or benchmarks by which the firm can assess its progress o Outline what the firm hopes to achieve within a specific time frame in a number of areas, including financial performance, market share, and new product introduction  Process of analyzing firm’s external and internal environments as well as vision and mission is an input for strategy formulation o In formulating strategy, manager identifies how a firm can best align its resources to carve out a defensible position in the marketplace o Strategy describes how firm seeks to achieve objectives D. Strategy Formulation  Development of strategy should be both a planned and emergent process o Planned component involves systematic assessment of external and internal environments, creation of plans to react to or impact environmental factors, and the establishment of objectives or benchmarks the firm hopes to achieved o Planned component is generally derived from a subset of individuals in the firm o Often top-down process with CEO and team outlining the core of firm’s vision and mission along with planned strategy  Strategy should also have an emergent component o Should be flexible and adaptable to changing environmental conditions o Including frontline managers in the strategy formulation tends to increase organizational consensus on strategic moves and the likelihood of successful implementation o Emergent component is more bottom-up  Strategy development process evolves over time o Some aspects of strategy will remain constant for a long period, while other aspects may be more susceptible to frequent changes  Stability is especially true for businesses in mature industries that are heavily regulated  Unlikely that the actions of one firm will dramatically impact the business environment  In dynamic, fast-changing industry, strategies and choices may be subject to constant change  Firm’s ability to navigate the constantly changing environment will enable it to maximize competitive advantage for a long time  The formulation of strategy is the first step toward creating value for customers and achieving profitability o By recognizing the system of activities that must occur in strategy development, leadership team can create a performance edge relative to competitors  Leaders must make a series of choices in considering strategy: o The range and variety of products an services to offer o How the firm seeks to position itself within the marketplace o The scale and scope of its operations o The firm’s organizational structure o How success will be measured  Choices above are often mutually dependent and reinforcing o The way a firm is organized depends on what it plans to produce and how it plans to produce it o Combination of choices that a firm makes should form an integrated whole that is greater than the sum of the individual parts  Strategic execution is vitally important to firm’s ability to achieve its overarching objectives IV. Defining Strategy: A Business Perspective  Finding a better way to do existing activities is not strategy, but rather referred to as increasing operational effectiveness because they enable the firm to operate more effectively than its competitors o These activities help the company reduce cost or increase efficiency and are important for maintaining profitability  Manager must consider 3 elements o Competitive strategy is primarily about being different, not about operational efficiency o Make tradeoffs and decide what not to do o Create a solid fit among the activities so product or service being offered cannot easily be copied by competitors  Manager must also emphasize performance while constructing the system A. Choosing a Set of Activities  Strategy should outline what the firm hopes to achieve and how it seeks to achieve those objectives  Strategic position: refers to a place in an industry that a firm occupies by way of the products or services it offers and the method in which it chooses to deliver them  Most common strategic positions are based on cost leadership, differentiation, and focus  Focus strategy narrows the scope to focus on a niche market within an industry, not the industry itself o Companies use cost leadership and differentiation to cater to market segments that are overlooked by larger companies B. Making Tradeoffs  If companies try to be all things to all people, they are often seen as lacking focus  Tradeoff example: Edward Jones seeks to bring financial services to rural customers, who typically have fewer financial assets than people who live in metropolitan markets C. Creating Fit Among Activities  Companies that have superior strategies and profitability often employ a set of activities that reinforce each other and make the whole system difficult to duplicate  Goal of creating this “fit” among activities is to reduce cost or increase differentiation at a firm relative to competitors  Important for sustainability of competitive advantage o It’s often harder for a rival to match an array of interlocked activities than it is to imitate a particular advertising campaign or set of product features V. Business-Level v. Corporate Level Strategy A. Business-Level  Entails how a company will compete in a given business and position itself among competitors  Manager evaluates both the attractiveness of the industry structure and the firm’s resources to determine how the firm should compete  Manager typically chooses among 3 generic strategic approaches: low cost, differentiation, and focus  Tightly intertwined with industry dynamics and evolution B. Corporate-Level  Decisions include how many industries to compete across, whether to vertically integrate, whether to buy or sell companies, and how to share resources across divisions  Often entails identifying and developing strategic alliances and partnerships with other firms  The way a company seeks to create value through the configuration and coordination of multimarket activities  An industry’s profitability profile influences how a manager should define his/her firm’s business-level and corporate- level strategies o Depends on ability to create long-term value for customer VI. Strategies for Going Global  Often requires managers to balance the opposing forces of scale and local responsiveness  Main differences of various global strategies concern operational efficiency and customization  Multinational strategies: used when it’s important to be responsive and sensitive to local needs and tastes o Usually involves significant customization of a firm’s products  Global strategies: focus on developing overall scale economies and global efficiency instead of catering to local tastes o Primary goal is cost management  International strategy: cross; like global, maintains control over subsidiaries; like multinational, allows subsidiaries to develop new products and ideas to match local tastes  Transnational strategy: focuses on efficiency, local responsiveness, and organizational learning A. Multinational Strategy  Parent company organized local subsidiaries and gives them autonomy to develop products tailored to local tastes o Local subsidiary may perform all corporate functions at local level  Can have tremendous overhead expense  Firm could have dozens of marketing organizations attempting to localize products according to specific preferences o Creates additional expenses and makes coordination difficult  Ex) McDonald’s adapts its menu in different countries B. Global Strategy  Attempts to provide a standardized product to all markets  Main goal is to take advantage of scale economies in production o Firm can take advantage of efficiencies and cost savings that come with massive production  Strategy works well for products that are conducive to standardization, but manager must consider preferences and minimum efficient scale needed to make the product profitable C. Internal Strategy  Combines the elements of multinational and global strategies o Like multinational—focus on using foreign subsidiaries to produce and distribute products o Like global—critical processes are performed by the parents company in its home market (i.e., R&D)  Firms compete in markets that don’t require high levels of local customization or low-cost production through economies of scale  Allows parent firm to tightly control the development of products and innovation  Not particularly useful for adapting products to local preferences or achieving economies of scale D. Transnational Strategy  Key attribute: ability to balance strategy among efficiency, local responsiveness, and organizational learning  Allows a firm to respond to dynamic environmental factors  Firms develop flexibility by balancing scales of efficiency while responding to local needs  Centralizes some resources at home and distributes other resources among global units, which can result in a complex configuration of assets and capabilities  Firm must have the ability to share and diffuse information and learning across the entire firm  Some firms become too dispersed among their activities; certain global markets may call for an alternative global strategy  Manager must match a firm’s strategy to the global business environments in which it competes VII. Market Entry Strategies  Determining which country to enter depends on its market and learning potential o Market potential = overall market size of a particular region and its growth prospects  As consumers in emerging markets start earning higher incomes, they will demand more items  Manager needs to decide mode of entry for a particular market o Must decide the extent to which a firm will export its goods or produce them locally o Must decide whether the firm will own all of the production assets or share ownership with another party  Low ownership structures (franchising or licensing) or high ownership structures (alliances, joint ventures) or total ownership through a wholly owned subsidiary A. Exporting  Involves shipping a firm’s products from its domestic home base to global markets  Positive: exporting provides many firms an opportunity to begin the global expansion process in an inexpensive and low-risk way  Negative: big challenge is loss of control over sales and marketing in the international market o Occurs when a firm cedes control to a foreign group that may not understand the product and sales process as well as the firm does o Can be avoided by managing sales process itself  Negative: susceptible to political or economic instability and can be dramatically impacted by tariff legislation B. Licensing and Franchising  Low-cost methods  Licensing: contractual arrangement whereby the licensor allows its technology, patents, trademarks, designs, processes, know-how, intellectual property, or other proprietary advantage to be used for a fee by the licensee o Majority involves technology transfer among industrialized nations o Allows many firms to test a foreign market before seeking a higher-impact entry strategy o Most important risk is potential loss of proprietary advantage  Franchising: organizational form where the franchisor of a service, trademarked product, or brand name allows the franchisee to use the name in return for a lump sum payment or royalty, while conforming to required standards of quality and service o Used by service forms like hotels and fast-food chains o Typically, franchisor provides brand name and other managerial processes while the franchisee assumes most or all capital risk C. Joint Ventures and Alliances  Joint Venture: two firms come together to form a new company in the market  Popular with firms looking to expand in Chinese market in the 80’s  Foreign firm gains from local firm’s knowledge of market and country o Both firms typically contribute resources to the venture, allowing both to share risks  Varied results over the years (about 50% success rate) o Challenges involving strategy, governance, or organizational issues o Members of joint venture may have different strategic interests, which can lead to disagreement o Many partners find it difficult to overcome vast cultural differences that exist between the partners  Alliance: partners come together by contract to engage jointly in activities in a market o Involves a firm sharing resources or capabilities with a counter party for the mutual benefit of both o Can be used to obtain a competitive advantage in a market or to achieve competitive balance  Alliances are often pursued to improve position in the marketplace  Low-cost but take time and effort to establish and cultivate  Firm should pursue alliances or joint ventures based on environmental conditions in the market o Also when the potential for integration of global operations is low o Firms are forced to engage in local alliances or joint ventures in countries that require local equity participation D. Wholly Owned Subsidiaries  Firm sets up a fully operational, independent entity in a foreign country to conduct business in that market  Many firms use this mode of market entry exclusively because of the sensitive nature of their technology or processes  Allows the parent company to maintain tight control over the new enterprise o Important when the firm’s products or services involve tightly fitting activities that may be difficult for an alliance or joint venture partner to understand  Expensive and risky  Firm must establish production facilities and train employees in the new market  Manager needs to maintain creativity and flexibility in terms of adapting a firm’s processes to the local infrastructure and overall environment VIII. Chapter Review A. Summary  B. Key Terms  Alliances  Business-level strategy  Competitive advantage  Conglomeration  Core competencies  Corporate-level strategy  Exporting  Franchising  Global strategies  Goal  International strategies  Joint venture  Licensing  Mission  Mission statement  Multinational strategies  Objectives  Operational effectiveness  Return on equity  Strategic position  Strategy  Strategy formulation  Transnational strategies  Vision  Wholly owned subsidiary Lecture Notes I. Strategy and Competitive Advantage a. Strategy (Game Plan… the “what” and “how”)  Pursuing a set of unique activities that provide value to customers  Making tradeoffs about o Which businesses to pursue o What products to produce o Which customers to serve  Aligning resources to achieve organizational objectives  For sustainability, it must be: o Consistent with external environment o Aligned with firm’s internal capabilities o Dynamic (flexible) b. Competitive Advantage  Create more economic value than competitors by engaging in a strategy that is difficult or impossible for others to duplicate  Unique activities that provide value to customers o We have to think differently  Making tradeoffs o Organizational constraints ($), still want wins  Aligning resources to achieve organizational objectives  Create more economic value than competitors o Difficult to duplicate strategy… II. A Brief History of Strategy  The Art of War (480-221 BC)—Chinese military treatise written by Sun Tzu o More important to out-think than to outmaneuver the opponent through physical force  Roman Empire o Tactical implementation of military strategies that were contingent on internal and external assessments  Rules of engagement (war or business) o Generate better information than your rivals o Analyze that information to make informed choices o Quickly select among choices o Convert strategic choices into decisive actions  Corporate Planning o The need to understand the competitive landscape led early business leaders to focus on corporate planning o Became popular in the post WWII era as businesses grew in size, scope, and complexity o Planning process involved the development of detailed forecasts and business level goals and objectives o Plan needs to be robust and well thought out, but also fluid and adaptable—living document  Strategy—viewed as a framework, or tool for managers to allocate resources and evaluate activities, rather than a fixed plan III. Conglomeration  Act of growing through unrelated diversification, essentially by acquiring companies in different industries  Ex) GE o Appliances o Aviation o Capital o Consumer Electrics o Healthcare o Home Improvement o Housewares o Lighting o Mining o Oil and Gas o Software o Transportation o Etc. Etc. IV. Strategy and the Organization: A Framework  Decisions to make in the development of strategy: o What is the purpose of our business (goal)?** most important o How will environmental forces impact our firm? o What stakeholders are important? o In what business areas will we compete? o Who will we serve? o How to distinguish our firm from competitors? V. The Purpose of Business  Milton Friedman o The only goal of a business is to focus exclusively on making profits so that it creates the most value for its shareholders or owners of the business  Stakeholder View o While the firm’s primary goal is to increase profit, VI. Benefits of Effective Mission Statements  Define the purpose of the firm  Build motivation and commitment among employees  Provide direction and inspiration  Serve as a focal point  Assist in making strategic tradeoffs o Next—Objectives (financial performance, market share, new product introduction) set the what and when… ENDS o Need specific details on how…these specifics become clearer with Strategy…MEANS VII. Strategy Formulation  Identifying how a firm can best align its resources to carve out a defensible position in the marketplace  Development of a strategy: o Is the first step toward creating value for customers and achieving profitability o Is both a planned and emergent and evolving process  Planned: top down  Emergent/evolving: bottom up o Is directed as a top-down process under the guidance of an upper management team by the CEO o Doesn’t always flow in a linear fashion due to the dynamic nature of the business environment o Involves making a series of strategic choices a. Strategic Choices  Choices to be made when formulating a strategy: o The range/variety of products and services to offer o How the firm will position itself within marketplace (Differentiation, cost leadership, focus) o The scale and scope of its operations o The firm’s organizational structure o How success will be measured  Often mutually dependent and reinforcing decisions b. 3 components of strategy  Managing tradeoffs o Must decide what NOT to do, focus  Choosing a set of activities o Strategic position and core competencies— uniqueness that brings value (not operational efficiency)  Creating fit o Sustainable, interlocking, desired by customers and not easily copied VIII. Business-Level v. Corporate-Level Strategy a. Business Level Strategy  The determination of how a company will compete in a given business and position itself among its competitors b. Corporate-Level Strategy IX. Strategies for Going Global  Multinational strategies o The parent company organizes local subsidiaries and gives them autonomy to develop products tailored to local tastes (increases overhead, coordination among units difficult0 o Ex) Philips  Global Strategies o Focus on developing overall scale economies and global efficiency instead of catering to local tastes o Ex) Apple, Panasonic  International Strategies o Combine elements by using foreign subsidiaries to produce and distribute products (MN)—rely on parent for core processes, and distribution of tech & innovation (G) o Ex) GE  Transnational Strategies o Balance a firm’s international activities among efficiency, local responsiveness, and organizational learning—Use the organization learning to inform when/where to focus on efficiency and when/where to focus on local responsiveness o Ex) Unilever, P&G X. Market Entry Strategies a. Exporting  Shipping a firm’s products from domestic home base to global markets  Inexpensive, low-risk  Loss of control over sales and marketing in local market  Susceptible to political or economic instability; tariffs b. Licensing  Contractual arrangement whereby the licensor allows its technology, patents, trademarks, designs, processes, know-how, intellectual property, or other proprietary advantages to be used for a fee by the licensee (generally manufacturing)  Potential loss of proprietary advantage c. Franchising  Arrangement which involves a corporation sharing management and marketing techniques with the owner in exchange for a fee and some percentage of the unit’s revenues (generally service firms)  Franchisor provides brand name and managerial processes  Franchisee assumes most of capital risk  Low control over quality in the local market d. Joint Venture  Structure where 2 firms come together to form a new company in a market  Foreign firm gains from local firm’s knowledge of market  Challenges of strategy, governance, organizational issues—cultural differences e. Alliances  Structure where partners come together by contract to engage jointly in activities in a market (not a new entity)  Used to obtain competitive advantage in a market  Takes time to establish and cultivate f. Wholly Owned Subsidiary  Fully operational, independent entity that a firm sets up in a foreign country to conduct business in that market (important if a company’s intangible assets are considerable—e.g., intellectual property, technology)  Expensive, risky


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