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301 Cards in this Set

  • Front
  • Back
Strategy
a set of related actions that managers take to increase their company’s performance.
Strategic leadership
how to most effectively manage a company’s strategy making process to create a competitive advantage.
Strategy formation
the task of selecting strategies
Strategy implementation
task of putting strategies into action (designing, delivering, supporting products, improving efficiency and effectiveness of operations, organizational structure, control systems and culture.
what factors are important in increasing shareholder value?
To increase shareholder value, manager must pursue strategies that increase the profitability of the company and ensure that profits grow.
what is the goal of profit making companies?
To maximize shareholder value
why are shareholders important?
-Shareholders provide a company with the risk capital to buy resources
-Shareholders are the legal owners of the corporation-shares = claim on profits
what is risk capital?
capital that can’t be recovered if a company fails > bankrupt
what is shareholder value?
the returns that shareholders earn from purchasing shares
• Capital appreciation + Dividend Payments
what is profitability?
Result of how efficiently and effectively managers use capital to produce goods/services and satisfy customer needs.
what is ROIC?
Return on invested capital = Net Profit (after tax)/capital invested (D+E)
how is profit growth measured?
measured by the increased in net profit over time (growth in EPS)
how do you attain profit growth?
sells products in rapid markets, gains market share from rivals, increases the amount it sells, expands overseas, and diversified into new lines of business.
when does a company have a competitive advantage?
when profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers.
what is a sustained competitive advantage?
strategies enable to maintain above average profitability for years.
what is a business model?
a manager’s conception of how the set of strategies his company pursues mesh together enabling a competitive advantage, achieve superior profitability and profit growth.
what should a business model contain?
 Select customers, define/differentiate product offerings, create value, acquire/keep customers, produce goods + services, lower costs, deliver, organize activities, configure resources, and achieve/sustain profitability, growth.
who are general managers?
responsible for overall performance of company/unit/product line
who are functional managers?
responsible for supervising a particular function, task, activity or operation (accounting, marketing, RD, IT, logistics)
company
a collection of functions or departments that work together to bring a particular good or service to the market.
multidivisional company
company that competes in several different businesses and created a separate, self-contained vision to manage each.
3 Levels of Management
Corporate, business, functional
corporate level managers
-CEO, senior executives, corporate staff: oversee development of strategies for Whole Corporation.
-Define goals, what business to be in, allocating resources, formulate/ implement strategies, leadership
-Link between people who oversee the strategic development of firm + who own it. Agents of the shareholders.
business level managers
-Translate the general statements of direction from the corporate level and into strategies for individual businesses.
business unit
a self-contained division (own function-finance) that provides a product or service for a particular market.
functional level managers
o Responsible for the specific business functions of operations (HR, Purchasing, CS)
-Develop functional strategies in their area that help fulfill the strategic objective set by business/corporate level managers
model of the strategic planning process
o Select the corporate mission and major corporate goals
o Analyze the organization’s external competitive environment to identify opportunities + threats
o Analyze the organizations internal operations environment to identify the organizations strengths and weaknesses. (strategy formulation)
o Select strategies that build on strengths and correct weakness to take advantage of external opportunities and counter external threats. (strategy formulation)
o Implement the strategies (allocating roles, responsibilities, organizational structure, allocating resources-capital/money, short term objectives, designing control + rewards.
mission statement
provides framework or context where strategies are formuilated-4
-Statement of reason d’etre (reason for existence) : mission
-Statement of a desired future state: vision
-Statement of the key values the organization is committed to
-Statement of major goals
mission
describes what the company does. Focuses on customer needs that the company is trying to satisfy. Define business in 3 dimensions:
-Who is being satisfied (what customer groups)
-What is being satisfied (what needs?)
-How customers’ are needs being satisfied (skills, knowledge, competencies?)
vision
lays out a desired future state-what the company would like to achieve.
values
state how managers and employees should conduct themselves, how to do business, what kind of organization they should build to achieve mission.
stakeholders
individuals or groups that have an interest, claim, or stake in the company, what it does and how well it performs. Stockholders, bondholders, employees, customers, communities.
goals
: a precise and measurable desired future state. Specify what must be done to attain mission/vision. 4 characteristics:
-Precise + measurable/Address critical issues/Challenging but realistic/Specific a time period
external analysis
o Purpose is to identify strategic opportunities and threats.
 Industry environment in which the company operates > competitive environment
 Country or national environment-impact of globalization
-Socioeconomic or macroenvironment-social, government, legal factors
Internal Analysis
o Reviews the resources, capabilities and competencies of a company
o Identifies strengths and weaknesses of the company
SWOT analysis
Identify strategies to exploit external opportunities, counter threats, build on and protect company strengths and eradicate weaknesses
goal of SWAT
create, affirm or fine tune a business model that will best align, fit a company’s resources and capabilities to the demands of the environment
functional level strategies
improving effectiveness of operations in a company.
business level strategies
businesses overall competitive theme, positioning strategies to gain a competitive advantage (cost leadership, differentiation, niche
global strategy
how to expand operations outside home country to grow
corporate level strategies
what business should we be in to maximize the long run profitability + profit growth of the organization?
examples of strategy implementations and what actions taken
o Taking action as functional, business, corporate levels to execute strategic plan.
-Ex) quality programs, changing design, positioning different, price changes)
feedback loop
o Execution of strategy must be monitored. Info + knowledge is passed to corporate level through feedback loops + is input for next strategy formulation + implementation
planned strategies
o Strategies are a result of a plan-rational + structured > created by top management
criticisms of planned strategies
o Criticisms because unpredictability of real world, role that lower level managers can play in strategic management process + that many successful strategies result in serendipity.
Unpredictable world
o Plans can become useless because unforeseen change.
o Must be able to adapt quickly-flexible approach is not possible in traditional planning
autonomous action
Making by Lower-Level Managers
o Too much importance it attached to role of top management-lower levels can influence and may be the first ones to recognize new strategic opportunities + lobby for strategic change because no emotional commitment to the status quo
serendipity and strategy
o Many successful strategies are not the result of well thought out plans
o Company’s realized strategy
the product of whatever planned strategies are actually put into action and of any unplanned or emergent strategies
emergent strategies
unplanned responses to unforeseen circumstances
unrealized strategies
planned strategies that respond to unpredicted change.
Strategic planning benefits
o Formal planning helps managers make better strategic decisions-positive impact on performance. Top level managers plan for current and future competitive environment.
scenario planning
Formulating plans that are based on what-if scenarios about future.
o Identify different possible futures>formulate plan to deal with futures, invest in 1 plan but hedge bets by preparing for other scenarios > switch strategy if other alternative is become likely.
ivory tower approach
Companies treat planning as an exclusive top management responsibility. Can lead to tensions because feel shut out from decision making process.
cognitive biases
the way human decision makers process info + reach decisions-fall back on heuristics or rules of thumb. Can result in poor decisions
prior hypothesis
decision makers have strong prior beliefs about the relationship between 2 variables + tend to make decision on the basis of these beliefs even if presented with evidence that their beliefs are wrong
escalating commitment
when decision makers already committed significant resources to a project and commit more resources even if project is failing.
reasoning by analogy
use of simple analogies to make sense of complex problems.
representativeness
tendency to generalize from a small sample or single case.
illusion of control
tendency to overestimate one’s ability to control events
 Overconfidence leads to hubris hypothesis of takeovers
availability error
predisposition to estimate the probability of an outcome based on how easy the outcome is to imagine.
3 techniques for improving decision making
devils advocacy, dialectic inquiry, outside view
devils advocacy
requires the generation of both a plan and a critical analysis of the plan. One member brings all the reasons that might make the proposal unacceptable.
dialectic inquiry
requires the generation of a plan (thesis) and a counterplan (antithesis) that reflects plausible but conflicting courses of action. Strategic managers listen to a debate between the two advocates and decide which will lead to higher performance.
outside view
requires planners to identify a reference class of analogous past strategic initiatives, determine whether those have succeeded or failed and evaluate the project against those prior initiatives.
what are the key characteristics of good strategic leaders that lead to high performance?
-vision, eloquence + consistency,
-articulation of the business model
-commitment
-being well informed
-willingness to delegate + empower
-the astute use of power
-emotional intelligence
o Vision, Eloquence and Consistency
 Give organization a sense of direction + can communicate these visions to others to energize people
o Articulation of the Business Model
 A business model is a manager’s conception of how the various strategies that the company pursues fit together into a congruent whole.
commitment
 Commitment to their vision and business model by actions/words, and lead by example.
being well informed
 Effective strategic leaders develop a network of formal + informal sources who keep them informed about what is going on in their company.
willingness to delegate + empower
 Empower is a good motivation tool + can’t be overloaded with responsibilities.
astute use of power
 Build consensus for their ideas-must act as members of a coalition or its democratic leaders.
emotional intelligence
a bundle of psychological attributes that strong + effective leader’s exhibit.
self awareness
understand one’s own moods, emotions and drives + effects on others
self regulation
control or redirect disruptive impulses-think before act
motivation
passion for work that goes beyond money/status
empathy
understand the feelings/views of subordinates
social skills
friendliness with a purpose.
emotional intelligence examples
-self awareness
-self regulation
-motivation
-empathy
-social skills
opportunities
company can take advantage of conditions in environment to formulate + implement strategies that enable it to become more profitable.
threats
conditions in external environment endanger the integrity + profitably of the company
industry
a group of companies offering products or services that are close substitute for each other. Products or services that satisfy the same basic customer need.
what is the starting point of external analysis?
to identify the industry that a company competes in
sector
group of closely related industries. Ex) computer sector = disk drive, modem, i-phone
market segments
distinct groups of customers within a market-differentiated from each other on distinct attributes and specific demands. Ex) Beer-mass market brands, weight conscious, premium price
when the forces of porters 5 forces are strong what happens?
harder to raise prices + earn profits
what are porters 5 forces?
5 forces that shape competition within an industry
o Risk of entry by potential competitors
o Intensity of rivalry among established companies within an industry
o Bargaining power of buyers
o Bargaining power of suppliers
o Closeness of substitutes to an industry’s products
•Risk of Entry by Potential Competitors
o Potential competitors: companies not currently competing in an industry but have capacity to do so.
o High risk of entry by potential competitors: threat to the profitability of established companies
o Risk of entry is low by potential competitors: established companies can take advantage of opportunity to raise prices + earn greater returns.
o Barriers: economies of scale, brand loyalty, absolute cost advantages, switching costs, gov. regulation
what are barriers for potential competitors?
economies of scale, brand loyalty, absolute cost advantages, switching costs, gov. regulation
economies of scale?
when unit costs fall as a firm expands its output.
how can economies of scale happen?
 Cost reductions through mass producing a standardized output,
 discount on bulk purchases of raw material inputs + components
 advantages gained by spreading fixed production costs over a large production volume
 Cost savings with spreading marketing and advertising costs over a large volume of output.
brand loyalty
when consumers have a preference from the products of established companies
 Created though continuous advertising of its brand name products, patent protection, product innovation through RD, emphasis on high quality, good after sales service.
absolute cost advantages
entrants cannot expect to match established companies lower cost structure.
• Comes from superior production operations + processes due to experience, patents’, or secret processes
• Control of particular inputs required for production-labor, materials, equipment, and management skills.
• Access to cheaper funds because they have lower risk
customer switching costs
it costs a customer time, energy, + money to switch from the products offered by a new entrant
government regulation-what happens when entry barriers fall
o Falling entry barriers due to government deregulation results in new entry, increase intensity of industry competition and lower industry profit rates.
rivalry
competitive struggle between companies in an industry to gain market share from each other.
 Fought> Price, product design, promotional spending, direct selling, after sales service + support
 Intense rivalry lowers prices + raises costs-squeezes profits out of an industry
intensity of rivalry is a function of what 4 factors?
 Industry competitive structure
 Demand conditions
 Cost conditions
 Height of exit barriers in the industry
competitive structure
Number and size distribution of companies.
fragmented industry
large # of small or medium sized companies-can’t determine industry price
 Dry cleaning, video rental, health clubs, real estate, tanning. Commodity=low barriers
consolidated industry
dominated by a small # of large companies-CAN determine industry prices.
 Aerospace, soft drink, automobile, pharmaceutical, beer.
what does growing demand do?
reduces rivalry, increases industry profits
in industries with high fixed costs-how is profitability leveraged?
profitability is leveraged by high sales volume > desire to grow volume can spark rivalry
fixed costs
Costs that must be borne before the firm makes a single sale.
exit barriers
economic, strategic and emotional factors that prevent companies from leaving an industry
o High barriers > companies are locked into unprofitable industry where demand is static/declining
examples of high exit barriers
 investment in assets (machines) that are of little value in alternative uses or can’t be sold
 High fixed costs such as health benefits, pensions ,severance pay
 Emotional attachment to an industry
 Economic dependence on an industry b/c it relies on a single industry for its revenue + profit
 Need to maintain an expensive collection of assets to participate effectively in the industry
 Bankruptcy regulations
bargaining power of buyers
: ability of buyers to bargain down prices charged by companies in the industry or to raise the costs of companies in the industry by demanding better product quality + service
buyer
individual customers who consume products OR companies that distribute an industry’s products
what conditions are buyers most powerful?
 Industry supplying a product/service has many small companies + buyers are large + few in #.
 Buyers purchase in large quantities-can bargain for price reductions
 Supply industry demands on buyers for a large % of total orders
 With low switching costs, buyers can play off other companies to force prices down
 When buyers can threaten to entry the industry + produce the product themselves
suppliers
the organizations that provide inputs into the industry-materials, services, labor
bargaining power of suppliers
ability of suppliers to raise input prices or costs of the industry
what do powerful suppliers do?
o Powerful suppliers squeeze profits out of an industry by raising costs of companies in the industry-threat
when are suppliers most powerful?
 Product has few substitutes + is vital to the industry
 Industry is not an important customers to the suppliers
 Companies would experience high switching costs if they moved to a different supplier
 Threaten to enter customers industry + use their inputs to produce products-compete
 Companies in the industry cannot threaten to enter their suppliers industry and make their own inputs as a tactic for lowering the price of inputs
substitutes
products of different business or industries can satisfy different customer needs
complementors
companies that sell products that add value to the products of companies in an industry because when used together the products better satisfy company demands.
what is the effect of a strong complementor?
boost demands and profits in the industry
what is the effect of a weak complementor?
threat>slows industry growth + profitability
proprietary
high risk + high return
high RD
generic
low risk + low return
low RD, production, low spending
products are close substitutes-rivalry is high-price competition has led to lower profits
who are a companies closest competitors
those in its strategic group-threat
mobility barriers
within-industry factors that inhibit the movement of companies between strategic groups. Ex) barrier to enter into a group and barriers to exit a group.
before a company enters another strategic group, what must it do?
evaluate whether it has the ability to imitate, outperform its potential competitors. Is it cost effective?
industry life cycle
identifies 5 sequential stages in the evolution of an industry that lead to 4 distinct kinds of industry environment:
 Embryonic > Growth > Shakeout > Mature> Decline
embryonic industry
just beginning to develop-growth is slow because buyers are unfamiliar with the product, high prices cause no economies of scale yet + poorly developed distribution channels.
 Barriers: access to technology known how. PC’s in 1970s
 Rivalry: educating customers, opening up distribution channels and perfecting the design
 Company that is first to solve design problems > develop market position
growth industry
demand for the industry’s product begins to take off
 First time demand is expanding rapidly as new customers enter market
 Grows: When customers are familiar with product, prices fall cause economies of scale, + distribution channels develop. EX) wireless phone in 1990s
 Threat: potential competitors is highest
 New entrants can enter without more rivalry because of increased market share availability
shakeout stage
rate of growth slows. Demand approaches saturation levels. Demand is limited to replacement because few potential 1st time buyers left
 Rivalry becomes intense-excess productive capacity > price war.
mature stage
market is totally saturated. Demand is limited to replacement demand or population expansion
 Growth is slow or zero
 Barriers of entry increase + threat from potential competitors decrease.
 Competition for market share develops + drives down prices.
 Try to minimize cost + built brand loyalty. Most industries consolidates >oligopolies
decline stage
growth becomes negative. Technological substitution, social changes, demographics, international competition.
 Degree of rivalry increases.
 Excess capacity so companies cut prices-price war.
 Higher exit barriers = harder to reduce capacity + greater threat of severe price competition
what is the problem about an industry life cycle?
o Industry life cycle is a generalization
competition is a process driven by...
innovation
punctuated equilibrium
the view of the evolution of industry structure. Long periods of equilibrium when industry’s structure is stable are punctuated by periods of rapid chance industry is revolutionized by innovation. Unfreezing + freezing
what does innovation do?
o Innovation lowers barriers, allows more companies into industry + lead to fragmentation
the macroenvironment
o Economic, global, technological, demographic, social and political forces can change conditions
o These have a direct impact on the forces in Porters model-Altering the relative strength of the forces
macroeconomic forces
o Macroeconomic forces: affect the general health + well-being of a nation or regional economy of an organization, and affects companies + industries ability to earn an adequate rate of return.
o 4 most important factors: growth rate of the economy, interest rates, exchange rates + inflation rates
growth rate
Expansion in customer expenditures-ease of pressures/expand + earn high profits. Decline/recession- reduction in customer expenditures –increase competitive pressures-price war
interest rates
determine the demand of a company’s products. Rising = threat, Fall-opportunity
currency exchange
define value of different national currencies against each other.
• Low dollar = reduces the threat from foreign competition while increase opportunities for increase sales overseas
price deflation
destabilize economy-slow economic growth
low barriers to international trade:
gives company opportunities to grow their profits faster
o Also makes it easier for foreign companies to enter domestically > increase competition-lower profits
perennial gale of creative destruction-technological forces
can make established products obsolete overnight and simultaneously create a host of new products. Creative + destructive > opportunity + threat
demographic forces
outcomes of changes in the characteristics of a population-age, sex, gender, ethnicity, race, sexual orientation, social class.
social forces
the way in which changing social mores and values affect an industry
political + legal forces
outcomes of change in laws and regulations
o Political processes-shape laws > constrain operations of organizations and managers
o Building blocks of competitive advantage
efficiency, customer responsiveness, reliable quality, innovation
internal analysis
identifying the strengths and weaknesses of a company
 3 step process
 Managers must understand the process by which companies create value for customers + themselves-role of resources, capabilities + distinct competencies in the process
 Understand importance of superior efficiency, innovation, quality and customer responsiveness are in creating value + generating high profitability
 Must be able to analyze the sources of their company’s competitive advantage to identify what is driving the profitability and where opportunities for improvement might lie.
distinct competencies
firm specific strengths that allow a company to differentiate its products from those offered by rivals + to achieve lower costs than rivals
 Distinctive competencies come from resources + capabilities
resources
refer to the assets of the company.
 Valuable if create strong demand for products + lower costs. Sustainable if RARE
tangible resources
physical entities- land, builds, PPE, inventory, money
intangible resources
created by managers/employees -brand names/reputation/knowledge through experience/intellectual property (patents, copyrights, trademarks)
capabilities
a company’s skills at coordinating its resources and putting them into productive use.
 Reside in organizations rules, routines, procedures, style it makes decisions and mangers internal process.
 Product of its organizational structure, processes, control systems and hiring systems
 Intangible. Lead to sustainable advantage if rare + protected from copying (barriers to imitation)
for a company to have a distinct competency, must at a minimum have:
 Firm specific and valuable resources and the capabilities to take advantage of that resource
 Firm specific capability to manage resources
• Competency is strongest when it possess firm specific + valuable resources + firm specific capabilities to manage those resources
role of strategy
o Distinctive competencies shape strategies which lead to a competitive advantage and superior profitability
o Distinctive competencies shape strategies and strategies help to build and create distinctive competencies
o Profitability of a company depends on 3 factors
 The value customers place on products > utility-perceived happiness from design, quality etc.
 Price the company charges for its product > consumer surplus-price charged is less than utility
 Cost of creating those products
value chain
a company is a chain of activities for transforming inputs into outputs that customer’s value.
primary activities
deal with design, creation, delivery of product, marketing, support after sales service.
 4 categories: RD, production, marketing + sales, Customer service
R&D
Concerned with design of products + production processes. Can create functionality of a product + make it more attractive to customers thereby adding value. It helps lower costs or raises the utility of a product and permit company to charge higher prices.
Production
concerned with the creation of a good/service. Physical products-manufacturing. Services-delivery. Performing efficient production can lower its cost structure and differentiate its product on quality.
Marketing function
brand positioning, advertising-increase value that customers perceive. Can discover customer needs and communicate them back to the RD function of the company.
service function
provide after sales service + support. Utility-solve problems.
support activities
provide inputs that allow the primary activities to take place.
 4 functions: materials management (logistics), HR, information systems + company infrastructure
materials management
controls the transmission of physical materials through the value chain, from procurement through production + into distribution. Efficiency > lower costs.
HR
ensures the company has the right mix of skilled people to perform its value creation activities. Ensure people are trained, motivated and compensated. If HR is functional > employee productivity rises (lowers costs) and CS improves (raises utility), enabling company to create more value.
Information Systems
electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with CS inquiries.
 Can improve efficiency + effectiveness
company infrastructure
Organizational structure, control systems, company culture.
o 4 factors help a company build + sustain competitive advantage:
 Superior efficiency
 Quality
 Innovation
 Customer responsiveness
o These competencies allow a company to differentiate its product offering + offer more utility to its customers + Lower its cost structure.
business
a device for transforming inputs into outputs
inputs
land, labor, capital, management, technological know how
outputs
goods + services produces
measure of efficiency
output/input (more efficient if need less input) > measure>employee productivity
employee productivity
output produced per employee > helps attain competitive advantage-lower
customers evaluate the quality of a product against what 2 attributes
quality as excellence
quality as reliability
product
bundle of attributes
attributes
form, features, performance, durability, reliability, style, and design.
superior quality
customers perceive attributes of higher utility than rivals
quality as excellence
products design, style, aesthetic appeal, features, functions, service (pay more). Increases value which increases price to charge.
quality as reliability
consistently does the job it was designed for, well and rarely breaks. Increases utility a consumer gets from a product > TQM. Increases value which increases price
higher quality =
increased utility = charge higher prices
TQM
total quality management-increasing product reliability is the central goal-JAPAN
innovation
act of creating new products or processes -*most important competitive advantage
product innovation
development of products that are new to the world or have superior attributes to existing products. More utility = increase price options
process innovation
development of a new process for producing products + delivering them to customers. (JIT, self-managing teams, reduced setup times). Lowers production costs,
customer response time
time it takes for a good to be delivered or a service to be performed.
customer responsiveness
o Customize goods to unique demands of individuals.
o Company must be able to do a better job than its competitors in identifying/satisfying customer needs
business model
a managers conception of how various strategies that a firm pursues fits together into a congruent whole, enabling the firm to achieve a competitive advantage
 The way managers configure the value chain through strategy + investments so they can build distinctive competencies to attain efficiency, quality, innovation and customer responsiveness
distinctive competencies
firm specific strengths that allow a company to achieve superior efficiency, quality, innovations and responsiveness to customers.
strategies
company implements a set of strategies to configure its value chain to create distinct competencies that give it a competitive advantage.
o To perform good internal analysis
managers must be able to analyze financial performance of company.
 Identifying how strategies contribute to profitability
 Need to benchmark performance of company against competitors + historical performance
 Help determine:
If they are more/less profitable than competitors, whether performance is improving or deteriorating over time.
• Companies strategies are maximizing the value being created
• Cost structure is out of line with competitors
• Using resources to greatest effect
ROIC
Return on capital invested. ROIC = NP after taxes/Invested capital. Measures effectiveness by which a company is using the capital funds that it has available for investment.
ROS
) = NP/rev > pursue strategies that reduce COGS, SGA, RD. How efficient a company converts revenues into profits
capital turnover
rev/invested capital (reduce working capital, PPE). How efficient company employs invested capital to generate revenues.
invested capital consists of what?
Interest bearing debt + shareholders’ equity
what determines how long a competitive advantage will last or its durability?
o Depends on barriers to imitation, capability of competitors + general dynamism of industry environment
barriers of imitations
determinant of the speed of imitation. Factors that make it difficult for a competitor to copy a company’s distinctive competencies.
o Barriers of imitation differ depending on whether the competitor is trying to imitate resources or capabilities
imitating resources
o Easiest for prospective rivals to imitate resources such as buildings, PPE b/c visible
o Intangible resources- harder to imitate. Brand names, marketing, technological knowhow,
imitating capabilities
o More difficult to imitate competencies.
 Based on the way decisions are made and processes are managed.
capacity of competitors to imitate competitive advantage is based on?
o Strategic commitment: a company’s way of doing business-develop particular resources + capabilities
o Absorptive capacity: ability of an enterprise to identify/ value, assimilate and use new knowledge.
dynamic industry
environment that is changing quickly
o Most dynamic industries have high rate of product innovation, shorter product life cycles, and competitive advantage can be fleeting.
failing company
profitability is substantially lower than the average profitability of its competitors. Lost the ability to attract + generate resources to its profit margins + invested capital are shrinking.
why do companies fail?
inertia, prior strategic commitments, icarus paradox,
inertia
o Companies find it difficult to change their strategies + structures when adapting to changing conditions
o Capabilities are difficult to change because a certain distribution of power and influence is embedded within decision making process.
icarus paradox
o Too many companies are dazzled by early success that they become too inner directed and lose sight of market realities + and requirements for achieving a competitive advantage.
steps to avoid failure
o Focus on the Building Blocks of Competitive Advantage-efficiency, innovation, customer responsiveness, quality.
o Institute Continuous Improvement + Learning
 Continuously improve these blocks. Improve operations + upgrade value of their distinctive competencies + creating new ones.
o Track Best Industrial Practice + use benchmarking
 Benchmarking: measuring the company against the products, practices and services of some of its most efficient global competitors.
o Overcome Inertia
 Implement change and have good leadership, judicious power, and appropriate changes in organizational structure + control systems
o Role of Luck
 Managers who strive to formulate + implement strategies that lead to a competitive advantage are more likely to be lucky.
functional strategies
aimed at improving the effectiveness of a company’s operations, and its ability to attain superior efficiency, quality, innovation and customer responsiveness
o Distinctive Competencies shape Functional strategies > functional strategies build resources + capabilities that enhance a company’s distinctive competencies.
examples of fixed costs
 Ex) purchasing machinery, setting up machinery, building facilities, advertising and RD
sources of economies of scale
 The ability to spread fixed costs over a large production volume
 Ability of companies producing in large volumes to achieve a greater division of labor + specialization
what is specialization favorable?
favorable impact on productivity because it enables employees to become skilled at performing particular tasks
diseconomies of scale
unit cost increases associated with a large scale of output,
 Occur because of the increasing bureaucracy associated with large scale enterprises + the managerial inefficiencies that can result.
 Large enterprises develop extensive managerial hierarchies where dysfunctional political behavior is common, info about operating matters is distorted by managerial layers and poor decisions can result
learning effects
cost savings that come from learning by doing.
 Labor-learns from repetition how to best carry out a task > labor productivity increases over time > unit costs fall. Management efficiency comes from managers learning how to run operations.
 Learning effects in a production setting with reduce the COGS as a percentage of revenues, enabling the company to earn a higher ROS and ROIC.
• Really important during the startup period of a new process and cease after 2 or 3 years
experience curve
refers to the systematic lowering of the cost structure and the unit cost reductions that have been observed over the life a product.
 As a company increases the accumulated volume of its output over time, it is able to realize both economies of scale (volume increases) and learning effects.
• This makes unit costs and cost structure fall with increase in accumulated output
 Increasing a company’s product volume and market share will lower its cost structure relative to its rivals.
• Must ride down experience curve as quick as possible
 3 reasons why managers shouldn’t be complacent about efficiency based cost advantages derived from experience effects
• 1) neither learning effects nor economies of scale go on forever- experience curve is likely to bottom out at some point
• 2) changes are taking place in the external environment that disrupt a company’s business model-cost advantages gain from experience effects can be obsolete from new technology
• 3) Producing a high volume of output doesn’t necessarily give a company a lower cost structure. Different technologies have different cost structures.
what is the best way to achieve high efficiency and a lower cost structure?
through the mass production of a standardized output.
flexible production technology
lean production-technologies designed to reduce setup times for complex equipment, increase the use of individual machines through better scheduling, improve quality control at all stages of the manufacturing process.
 Increase efficiency + lower unit costs relative to what can be achieved by the mass production of a standardize output which enables the company to customize its product offering.
mass customization
Ability of companies to use flexible manufacturing technology to reconcile 2 goals that were once thought to be incompatible: low cost + differentiation through product customization
flexible machine cells
flexible production technology. Grouping of various types of machinery-common materials handler + cell controller.
 Benefits of flexible machine cells-improved capacity utilization + reduction in WIP + waste.
 Reduction in setup times and the computer controlled coordination of product flow
 Flexible production technology should boost profitability by reducing COGS as a percentage of revenues, reducing the working capital needed to finance work in progress and reduce the amount of capital that needs to be invested in PPE to generate a dollar of sales.
marketing strategy
the position that a company takes with regard to pricing, promotion, advertising, production design and distribution.
customer defection rates
churn rates-the percentage of a company’s customers who defect every year to competitors.
lower rates = lower cost structure
customer loyalty
function of the ability of a company to satisfy its customers
what is a benefit of a long time customer?
loyalty-free advertising that customers provide- Referrals.
strategy of defection
• To develop a strategy-identify customer who has defected, find out why + act on the information.
materials management
encompasses the activities necessary to get inputs + components to a production facility through the production process + through the distribution system to the end user
JIT inventory
o Improving the efficiency of the material management function
 Designed to economize on inventory holding costs by having components arrive at a manufacturing plant just in time to enter the production process or to have foods arrive a retail store only when stock is almost depleted.
• Increase inventory turnover, reduces inventory costs and the company’s need for working capital.
drawback of JIT
deny customer’s buffer stocks of inventory.
solution to JIT issues
company may source inputs from multiple suppliers
supply chain management
task of managing the flow of inputs and components from suppliers into the company’s production process to minimize inventory holding and maximize inventorying turnover.
benefits of RD efficiency
o RD functions can boost efficiency by designing products that are easy to manufacture.
 RD can decrease assembly time >higher employee productivity > lower costs and higher profitability because cutting down on number of parts
o RD can help a company achieve a lower cost structure by pioneering process innovations
employee productivity
is one of the key determinants of an enterprises efficiency, cost structure + profitability.
 Productive employees > Lower costs of generating revenues, increase ROS, and boost company’s ROIC
how do we increase employee productivity?
• Hiring strategy: important to make sure hiring strategy of the company is consistent with its internal organization, culture, and strategic priorities.
• Employee training: Highly skilled people can perform tasks faster + more accurately + can learn complex tasks.
• Self-managing teams: members coordinate their own activities and make their own hiring, training, work and reward decisions. Rotate tasks and learn all jobs.
• Pay for performance: help boost productivity. Must define what kind of job performance to be rewarded and how
what does IS do?
o Web based IS reduces costs of coordination between the company and its customers and its suppliers.
 Automating customer and supplier interactions-reduce # people > reduce costs.
infastructure
company’s structure, culture, style of strategic leadership + control system determines the context within which all other value creation takes place.
 Strategic leadership-important because it articulates a vision that recognizes the need for all functions of a company to focus on improved efficiency. Cross functional cooperation.
superior quality gives companies 2 advantages
 Strong reputation for quality allows a company to differentiate its products from those offered by rivals, creating more utility and lets them charge more
 Eliminating defects of errors reduces waste, increases efficiencies and lowers cost structure to increase productivity.
reliability
product offering is to use Six sigma quality improvement methodology
steps for reliability/six sigma
 Improved quality means that costs decrease because of les rework, fewer mistakes, fewer delays and better use of time and materials
 As a result productivity improves
 Better quality leads to higher market share and allows a company to raise prices
 This increases company’s profitability and allows it to stay in business
 The company creates more jobs
high failure of innovation
 Many items fail because demand for innovations is uncertain
 New products fail because technology is poorly commercialized
 Poor positioning strategy
 Company’s make the mistake of marketing technology where there isn’t enough demand
 Slow to get products to the market
positioning strategy
specific set of options a company adopts for a product on four main dimension of marketing:
o Price, distribution, promotion + advertising, product features
reduce failure rate
-managers should have tight integration of RD production, + marketing
-create cross functional teams
-achieve responsiveness
 2 perquisites for achieving superior customer responsiveness
 A company has to develop competency I listening to and focusing on its customers and investigating/identifying their needs
 Constantly needs to seek better ways to satisfy those needs
how to increase the satisfaction of custoemr needs
• Companies can provide higher satisfaction by Customizing them where possible
• Reducing the time it takes to respond to customer needs
 To craft a successful business model a company must first define its business which entails decisions about:
• Customer needs, or what is to be satisfied
• Customer groups or who is to be satisfied
• Distinctive competencies on how the needs will be satisfied.
customer needs
desires, wants, or cravings that can be satisfied by means of the attributes or characteristics of a product (good/service).
o 2 factors determine which product a customer chooses to satisfy those needs:
 The way the product is differentiated from other products of its time to it appeals to customers.
 The price of the product
product differentiation
the process of designing products to satisfy customer’s needs. (charge more)
 A company obtains a competitive advantage when it creates, makes, and sells a product in a way that better satisfies customer needs than its rivals.
o Competitive Price: a price that offers customers as much or more
competitive price
: a price that offers customers as much or more value that products of its rivals.
customer groups
sets of people who share a similar need for a particular product.
market segmentation
the way a company decides to group customers, based on important differences in their needs or preferences to gain a competitive advantage.
 First segment into price ranges and then according to needs being satisfied.
3 main approaches to market segmentation:
 No market segmentation: company might choose not to recognize the different market segments and make a product targeted at an average customer. Customer responsiveness is at a minimum and competitive advantage is low price-not differentiation
 High market segmentation: company can recognize differences between groups and make a product targeted towards all of most of the different marker segments. Customer responsiveness is high and products are customized to meet specific needs-competitive advantage is differentiation
 Focused market segmentation: A company can target 1 or 2 segments and devote its resources to these segments. Responsive to select groups. Cano offer bare bone products to undercut prices by companies who focus on differentiation. Competitive advantage is low price or differentiation
value creation frontier
the maximum amount of value that the products of different companies in an industry can provide to customers at any one time using the different business models.
 Achieved by pursuing one or more of the 4 building blocks of competitive advantage.
 TO reach the value creation frontier and try achieve above average profitability, a company must formulate a business model based on 1 or combines the 3 generic business level strategies
3 business level strategies
cost leadership, differentiation and focused
cost leadership
company chooses strategies that do everything possible to lower its cost structure so It can make/sell goods or services at a lower cost than competitors
 2 advantages:
• Lower costs mean that it will be more profitable than its closest competitors
• Cost leader gains competitive advantage because it can charge a lower price.
 A company becomes a cost leader when its strategic managers make competitive positioning decisions:
focused cost leadership
based on combining the cost leadership and focused business level strategies to compete for customers in just one of few marker segments
 Concentrate on narrow segments that can be defined geographically , by type of customer, product line,
 Competes against the cost leader in the market segments where I can operate at no cost disadvantage.
offers products to 1 group of custoemrs and offers low prices
focused differentiation strategy
offers products to only 1 group of customers but offer unique products
differentiation strategy
offers products to many customers and offers unique products
differentiation
a company pursues business level strategies that allow it to create a unique product, one that customers perceive as different or distinct in some way.
 A differentiator gains a competitive advantage because it has the ability to charge a premium price for its product. (products are priced as high as customers are willing to pay)
o Substitute products are a threat ONLY if a competitor can develop a product that satisfied a similar customer need
o Focus differentiation
: company chooses to combine the differentiation and focused generic business level strategies and specialized in making distinctive products for 1 or 2 market segments
 Serves one type of customer.
 Competitive advantage because superior expertise in a particular field. Concentration on narrow range allows a focuser to develop innovations more quickly than a large differentiator

cant move easily into other market segments
broad differentiators
(middle of value creation): companies that have develop business level strategies to better differentiate their products and lower their costs structures simultaneously.
 These companies make different products that they can charge higher prices than differentiators because their cost structures are lower.
 Steadily increase the marker share and profitability over time.
what can change the competitive forces at work in an industry?
 Technological innovations that permit increased product differentiation
 Identification of new customer groups and market segments
 Discovery of superior ways to lower cost structure
strategic groups
the set of companies that pursue a similar business model
what business model would be best in a fragmented industry?
focused business modek
fragmented companies can develop strategies like;
o Chaining, franchising, horizontal merge and using the Internet and IT to realize the advantages of a cost leadership or differentiation business model.
chaining
o Chaining strategy: obtain the advantages of cost leadership.
o They establish networks of linked merchandising outlets that are interconnected by IT and function as 1 large company.
o They have enormous buying power and negotiate large price reductions with suppliers that promote their competitive advantage
o Overcome transportation costs by establishing regional distribution centers that economize inventory costs. Realized economies of scale
o Achieve cost and differentiation advantages. Change the competitive structure of the industry, consolidate it and weaken the 5 forces of competition
franchising
o Franchising: a business level strategy that allow companies to enjoy the competitive advantages that result from cost leadership + differentiation.
 The franchisor (parent) grants to franchisee the right to use the parents name, reputation and business model in a particular location or area in return for a sizable franchise fee and percentage of profits
 Benefit-franchisees own their business and are motivated to make business model work effectively and make sure quality standards are high.
 Franchising lessens financial burden of swift expansions. Benefits of large scale advertising as well as economies in purchasing, management and distribution.
horizontal merger
o Horizontal merger: consolidate respective industries. Companies are able to obtain economies of scale and secure a national market for their product
o Pursue cost leadership or differentiation
o Merge regional store chains to form a national company
o Embryonic stage:
one that is just beginning to develop
o Embryonic industries-emerge when a technological innovation creates a new product opportunity
 Customer demand is limited. Slow growth in demand because:
• Limited performance poor quality of 1st products
• Customer unfamiliarity with what new products can do for them
• Poorly developed distribution channels to get product to customers
• Lack of complementary products to increase the value of the product to customer’s
• High production costs because of small volumes of production
growth industry
first time demand is expanding rapidly as many new customers enter the market.
 These pose challenges because new groups of customer’s with different kinds of needs emerge
 Managers need to be aware if competitive forces because they have to build + develop new kinds of competencies and refine their business models to compete effectively in the long term.
when does a company move from embryonic to the growth stage?
when a mass market + large numbenr of customer enter the market
when do mass markets develop
• Ongoing technological progress makes a product easier to use and increases its value for the average customer
• Complimentary products are delivered that also increase its value
• Companies in the industry work to find ways to reduce the costs of making new products so they can lower their prices and stimulate high demand.
S curve
 Changing needs of customers lead to the s shape curve-illustrates how different groups of customers with different needs enter the market over time
• S shape because as the stage of market development moves from embryonic to mature customer demand first accelerates then decelerates as the market approaches the saturation point where most customer already owns the product.
innovators
: First group of customers to enter the market. “technocrats”
• People who are delighted by being the 1st to purchaser and experiment with a product w/ new technology.
early adopters
2nd group of customers to enter the market
• Understand the technology may have important future applications and are willing to experiment with it to see if they can pioneer uses for it. Try to profit from its use by envisioning how technology will be used in the future
early majority
forms the leading wave or edge of the mass market. Their entry signifies the beginning of the growth stage.
• Practical-understand new technology. Weight the benefits of adopting new products against their costs and wait to enter the marker until they are confident they will benefit.
late majority
customers who purchase new technology or products only when it is obvious that it has great utility and is here to stay.
• Usually older customers who are unfamiliar with new technology.
laggards
last group of customer’s to enter the marker.
• People who are conservative and distrustful of new technology. Refuse to adopt it even when the benefits are obvious.
 Different factors explain the variation in market growth rates for different products
relative advantage
compatibility
complexity
triailability
observability
relative advantage
o The degree to which a new product is perceived as better at satisfying customer needs than the product it supersedes
compatibility
o The degree to which a new product is perceived as being consistent with the current needs or existing values of potential adopters.
complexity
o The degree to which a new product is perceived as difficult to understand and use
trialability
o The degree to which potential customers can experiment with a new product on a hands on trial basis
observability
o Degree to which the results of using and enjoying new product can be seen and appreciated by other people
viral mode of infection
lead adopters become infected or enthused by the product and tell other people about the advantages.
investment strategy
determines the amount +type of resources and capital (human, functional and financial) that must be spend to configure a company’s value chain so that it can pursue a business model successfully over time.
what stage is competition strongest?
SHAKEOUT
o 2 factors are crucial in choosing an investment strategy
 The Competitive advantage of a company’s business model gives it in an industry relative to its competitors,
 The stage of the industry’s life cycle in which the company is competing
embryonic strategies
o In the embryonic stage, all companies emphasize the development of a distinctive competency to build a successful business model.
 Investment needs are great.
 Share building strategy: aim is build market share by evolving a stable and distinct competitive advantage to attract customers who have no knowledge of the company’s products.
growth strategies
o The task facing the company is to strengthen its business model to provide the competitive foundation to survive the shakeout
 Growth strategy: goal is to maintain it relative competitive position in a rapidly expanding market and to increase it.
 Market concentration strategy (companies in a weak competitive position) to find a viable competitive position. Seek to specialize in some way ad adopt a focus business model to rescue their investment needs.
shakeout strategies
o During shakeout stage, customer demand is increasing and competition by price or product becomes intense.
 Companies in strong competitive positions need resources to invest in a share increasing strategy
• Share increasing strategy: attract customers from weak companies existing in the market. Increase market share.
 Companies in weak competitive positions engage in harvest strategy
• Harvest strategy: limit or decrease its investment in a business and extract or milk its investment as much as it can.
maturity strategies
o Where competition is high and companies need to defend competitive position because low barriers, need to adopt a hold and maintain strategy
 Hold and maintain strategy: define their business models and ward of threats from focused companies that try to compete with industry leaders. Expend resources to develop distinctive competency.
o Companies can use 3 methods to deter entry by potential rivals + maintenance + increase industry profitability.
• Product Proliferation
o In the mature stage, companies move to increase their market share by producing a wide range of products targeted at different market segments.
 “filling the niches” or catering to the needs of customers in all market segments to deter entry
• Price Cutting
o Pricing strategies can deter entry and protect profit margins of companies already in an industry.
 Cut price every time a new company enters an industry or cut prices when a potential entrant is contemplating entry + then raise prices once the new or potential entrant has withdrawn.
 Charge a high price initially for a product and seize short term profits but then cut prices aggrievedly to build market share.
• Maintain Excess Capacity
o Maintain the physical capacity to produce more product than customers currently demand. Warns entrants that if they enter the industry, existing firms can retaliate by increasing output and forces down prices.
strategies to manage rivalry
o Price signaling, non-price competition and capacity control
price signaling
o When companies attempt to control rivalry among competitors so as to allow the industry to choose the most favorable pricing option
o Process by which companies increase or decrease product prices to convey their intentions to other companies + influence the way they price their products. Improves industry profitability
o Tit for tat: price signaling stratify where a company does exactly what its competitors do.
price leadership
o Price leadership: 1 company assumes the responsibility for setting the pricing option that maximizes industry profitability.
 Helps companies with high cost structures allowing them to survive without having to become more productive and efficient.
non price competitive stragies
 Market penetration, product development, market development and product proliferation
market penetration
o When a company concentrates on expanding market share in its existing product markers,
 Involves heavy advertising to promotion and build product differentiation.
product development
o The creation of new or improved products to replace existing ones. Stays in same product markets
market development
o Finds new market segments for a company’s products. Wants to capitalize on the brand name it has developed in one market segment by location new market segments in which to compete.
product proliferation
o Can be used to mange rivalry. Large companies have a product in each market segment and compete head to head for customers. Allows the development of stable industry competition based on product differentiation and not price.
o Battle is over perceived uniqueness, quality, features and performance. New products in new markets
capacity control
o When companies have excess capacity, they cut prices.
factors causing excess capacity
o Derives from technological developments
o New low cost tingly can produce more than old
o Competitive forces within an industry
intensity of competition depends on 4 factors
 Speed of decline
 Height of exit barriers
 Level of fixed costs
 Commodity nature of the product
4 strategies that companies cna adopt to deal with decline
 Leadership strategy: company seeks to become dominant player in a declining industry
 Niche strategy: focuses on pockets of demand that are declining more slowly than the industry as a whole
 Harvest strategy: optimizes cash flow
 Divestment strategy: company sells the business off to others.
leadership strategy
o Aims at growing in a declining industry by picking up the market share of industries leaving the industry.
o Makes sense when:
 Company has distinctive strengths that allow it to capture market share in a declining industry
 Speed of decline and intensity of competition is moderate
• Use aggressive pricing, marketing, acquiring established competitors,
niche strategy
o Focuses on pockets of demand in the industry where demand is stable or declining less rapidly than the industry as a whole.
harvest strategy
o Best choice when a company wishes to leave a declining industry and optimize cash flow.
 Makes sense when company sees a steep decline and intense future competition or lacks strengths relative to remaining pockets.
 Cut all new investments in capital equipment, advertising, RD.
divestment strategy
o Rests on the idea that a company can recover most of its investment in by selling early before the industry has entered into a steep decline.
o Appropriate when company has few strengths relative to pockets of demand.