week 4 honors strategic management notes
week 4 honors strategic management notes MGMT 3013H
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This 7 page Class Notes was uploaded by ajtovar on Sunday September 18, 2016. The Class Notes belongs to MGMT 3013H at University of Arkansas taught by Vikas Anand in Fall 2016. Since its upload, it has received 12 views. For similar materials see Honors Strategic Management in Management at University of Arkansas.
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Date Created: 09/18/16
CH 3 external analysis: industry structure, competitive forces, and strategic groups Tesla motors and the us automotive industry Hard to get into the market because you need to have large scale production Elon musk owns tesla and does electric cars and so he doesn’t need large scale production to be competitive. Model s has been very successful 1) Pestel framework: categorizes and analyzes an important set of external factors that might impinge upon a firm. These factors create both threats and opportunities a) Political, economic, sociocultural, technological, ecological, legal b) Task environment: do have control over c) General environment: don’t have control over i) Political factors: result from the processes and actions of government bodies that can influence the decisions and behavior of a firm (1) Nonmarket strategies: lobbying, pr, contributions, litigation, etc ii) Economic factors (1) Growth rates: measure of the change in the real amt of goods and services produced by a nations economy (2) Real growth rate: adjusts for inflation. Whether business is expanding or contracting (3) Levels of unemployment (4) Interest rates: amount creditors are paid for use of their money and the amt that debtors pay for that use, adjusted for inflation (5) Price stability: lack of change in price levels of goods and services – rare (a) Inflation: rising prices (b) Deflation: decrease in price (6) Currency exchange rates: determines how many dollars one must pay for a unit of foreign currency iii) Sociocultural factors: capture a society’s cultures, norms, and values (1) Demographic: population characteristics iv) Technological factors: capture the application of knowledge to create new processes and products (1) Lean manufacturing, six sigma quality, biotechnology, nanotechnology (2) Blackberry: failed both sociological and technological factors v) Ecological factors: environment, global warming, sustainable economic growth vi) Legal factors: official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions 2) Industry structure and firm strategy: five forces model a) Industry: group of incumbent co.s facing same set of suppliers and buyers b) Industry analysis: method to identify an industry’s profit potential and derive implications for a frims strategic position w/in an industry c) Strategic position: firm’s strategic profile based on the diff b/w value creation and cost (v-c) d) Five forces model: 5 forces that determine the profit potential of an industry and shape a firms comp adv e) Competition in the 5 forces model i) Economic value: v-c ii) Competitors: buyers, suppliers, potential new entry of other firms, substitutes iii) The stronger the 5, the lower the profit potential and vice versa iv) Airline industry: high rivalry, powerful buyers (can price compare online), entry barriers low, supplier power strong, substitutes high v) 1. Threat of new entry vi) 2. Power of suppliers vii)3. Power of buyers viii) 4. Threat of substitutes ix) 5. Rivalry among existing competitors f) Threat of entry: risk potential competitors will enter the industry i) 1. Existing firms may lower prices and make industry less appealing ii) 2. Existing firms could spend more to satisfy existing customers ex. Starbucks iii) Entry barriers (1) Economies of scale: cost advantages that accrue to firms w/ larger output because they can spread fixed costs over more units, employ tech better, benefit from a more specialized division of labor, and demand btter terms from suppliers (2) Networking effects: positive effect one user of a product or service has on the value of that product or service to other users (a) Threat of new entry decreases when network effects are present (3) Customer switching costs: moving one supplier to another (4) Capital requirements: price of the entry ticket (5) Advantages independent of size: brand loyalty, technology, raw materials, distribution channels, location, experience (6) Gov policy: threat of entry is high when no gov policies (7) Credible threat of retaliation by existing companies g) Power of suppliers i) Pwrful suppliers can raie the cost of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered. ii) Threat to industry cuz they reduce the industry’s profit potential by capturing part of the economic value created iii) Power of suppliers is high when: (1) Suppliers industry is more concentrated than the industry it sells to (2) Suppliers don’t depend heavily on the industry for a large portion of their revenues (3) Siginificant switching costs (4) Differentiated products (5) No readily available substitutes (6) Threat of forward-integration h) Power of buyers i) Concerns pressure an industry’s customers can out on the producers margins in the industry by demanding a lower price or higher product quality ii) Strong buyers can reduce industry profit potential and a firm’s profitability iii) Power of buyers is high when: (1) Few buyers and buy in large quantities (2) Undifferentiated products (3) No/low switching costs (4) Threat to backwardly integrate iv) Buyers are price sensitive when: (1) Buyers purchase represents a sig fraction of its cost structure (2) Buyers earn low profits (3) Quality of products is not affected by quality of inputs v) Ex. Walmart has huge buying power i) Threat of substitutes i) High when: (1) Attractive price-performance trade off (2) Low switching cost ii) Comp must be defined more broadly iii) Any of 5 forces on its own is strong enough to extract an industry’s profit potential j) Rivalry among existing competitors: i) Competitive industry structure: elements and features common to all industries (1) # and size of its competitors (2) Degree of pricing power (3) Type of product/service (4) Height of entry barriers ii) Four main comp industry structures: (1) Perfect competition (a) Many small firms (b) Firms are price takers (c) Commodity product (d) Low entry barriers (2) Monopolistic competition (a) Many firms (b) Some pricing power (c) Differentiated product (d) Medium entry barriers (3) Oligopoly (a) Few (large) firms (interdependent) (b) Some pricing power. Mostly non price competition (c) Differentiated product (d) High entry barriers (e) Ex. Fed ex and ups (4) Monopoly (a) One firm (b) Considerable pricing power (c) Unique product (d) Very high entry barriers iii) Industry growth (1) Ex. Demand for knee replacments (2) Rivalry among comp becomes fierce during slow or negative industry growth iv) Strategic commitments (1) If firms make strat commitments to compete in an industry, rivalry among competitiors is likely to be more intense v) Exit barriers (1) Economic and social factors (2) Low exit barriers is attractive k) A sixth force: role of complements i) Complement: product, service, or competency that adds value to the original product offering when the 2 are used in tandem (1) ex. Google and Samsung ii) co-operation: cooperation b/w competitors to achieve a strategic objective (1) ex. Google and Samsung against apple 3) changes over time: industry dynamics a) industry structures are not stable over time, theyre dynamic b) industry convergence: process by which unrelated industries begin to satisfy the same customer need. i) Often brought on by tech advances 4) Performance differences w/in the same industry: strategic groups a) Strat group: set of co.s that pursue a similar strategy b) Strategic group model: clusters diff firms into groups based on a few key strategic dimensions c) Intra-group rivalry exceeds inter-group rivalry i) Indentify most important dimensions ii) Choose 2 key dimensions for the x and y axis iii) Graph d) Comp rivalry is strongest b/w firms that are w/in the same strat group e) External environment affects strat groups differently f) 5 competitive forces affect strat groups differently g) Some strat groups are more profitable than others 5) Monility matters a) Mobility barriers: restrict movement b/w groups 6) Implications for the strategist a) Define the relevant industry b) Identify the key players in each of the 5 forces and attempt to group them into diff categories c) Identify the underlying drivers of each force d) Assess the overall industry structure Ch 4 book 1) Dr dre’s core competency a) Apple is hoping to get some of beets cool factor b) Celebrity endorsements c) Dr dre and iovine are smart, creative, and connected d) Apple needs a front-man 2) Core competencies: unique strengths, embedded deep w/in a firm a) Differentiate products which creates higher value b) Comp adv can be driven by core competencies i) Ex. Honda and small engine ii) Superior engineering know-how and skills c) Products are visible competencies and then there are invisible competencies d) Resources: any assets such as cash, buildings, machinery, or tech that a firm can fraw on when crafting and executing a strategy e) Capabilities: org and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically f) Activities: distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services g) Resources reinforce core competencies, while capabilities allow managers to orchestrate their core competencies 3) Resource based view: model that sees certain types of resources as key to superior firm performance a) Tangible resources: have physical attributes and are visible b) Intangible resources: don’t have physical attributes and are invisible c) Resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy d) 2 critical assumptions of rbv: i) Resource heterogeneity: firm is a bundle of resources and capabilities that differ across firms ii) Resource immobility: firm has resources that tend to be “sticky” and don’t move easily from firm to firm e) VRIO framework: explains and predicts firm-level competitive advantage i) Valuable: enables firm to exploit an external opportunity or offset an external threat (1) Increase in economic value creation (v-c) ii) Rare: only one or a few posses it iii) Costly to imitate: firms that do not possess the resources are unable to develop or buy the resource at a reasonable price (1) Direct imitation: way to copy or imitate a valuable/rare resource (2) Substitution: strategic equivalence (a) Amazon not having brick and mortar stores (3) Imitation and substitution (a) Ex. Samsung galaxy’s phone iv) Organized to capture value: must have in place an effective org structure and coordinating systems (1) Groupon: ability to imitate a rare and valuable resource is directly linked to barriers of entry (2) Groupon was imitated f) Isolating mechanisms: how to sustain a competitive advantage i) Some protection to a successful firm by making it more difficult for competitors to imitate the resources, capabilities, or competencies that underlie its comp adv (1) Better expectations of future resource value (2) Path dependence (3) Causal ambiguity (4) Social complexity (5) Intellectual property protection ii) Better expectations of future resource value: (1) firms can acquire resources at low cost (2) Lays foundation for a comp adv later when expectations about future of the resource turn out to be more accurate iii) Path dependence: options one faces in the current situations are limited by decisions made in the past (1) Ex. Carpet ind in Dalton, Georgia (2) Trying to achieve the same outcome in less time, even w/ higher investments, tends to lead to inferior results, due to time compression diseconomies (3) Firms cant compress time (4) Learning and improvements take place over time (5) Existing competencies must constantly be nourished and upgraded iv) Causal ambiguity: a situation in which the cause and effect of a phenomenon aren’t readily apparent (1) Managers need to have a hypothesis or theory of how to compete v) Social complexity: situations in which diff social and business systems interact (1) Social complexity emerges hen 2 or more systems are combined vi) Intellectual property protection (1) Patents, designs, copyrights, trademarks, and trade secrets 4) Dynamic capabilities perspective a) Core rigidity: a former core competency that turned into a liability cuz the firm failed to hone, refine, and upgrade the competency as the environment changed b) Dynamic capabilities: firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for comp adv c) Strategic fit in a dynamic fashion i) IBM: CEO kept IBM together as one entity which allowed them to integrate hardware, software, and services to provide sophisticated solutions to customer’s IT challenges (1) Cloud computing, systems of engagement, big data analytics (2) Transforming IBM for the long run d) Dynamic capabilities perspective: comp adv is the outflow of a firm’s capability to modify and leverage its resource base in a way that enables it to gain and sustain comp adv in a constantly changing environment i) Comp adv is derived from dynamic reconfiguration of a firm’s resource base ii) Resource flow: firm’s level of investments to maintain or build a resource iii) Resource stock: firm’s current level of intangible resources 5) The value chain analysis a) Value chain: internal activities a firm engages in when transforming inputs into outputs i) Each activity adds incremental value and incremental costs b) Activities: distinct actions that enable firms to add incremental value at each step by transforming inputs into goods and services c) When a firms distinct activities generate value greater than the costs to create them , they get a profit margin (assuming mkt price the firm is able to command is exceeds cost of a value creation) d) Primary activities: add value directly as the firm transforms inputs into outputs i) Supply chain management ii) Operations iii) Distributions iv) Mkting and sales v) After-sales service e) Support activities: add value indirectly i) Research and development (R&D) ii) Info systems iii) HR iv) Accounting and finance v) Infrastructure (processes, policies, procedures) f) To get comp adv: add incremental value and lower relative cost 6) Implications for the strategist a) SWOT analysis: framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses (S&W) with those from an analysis of external opportunities and threats (O&T) to derive strategic implications b)
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