notes for midterm1
TRANSCRIPT
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Mission/Goal
ExternalAnalysis
InternalAnalysis
StrategicChoice
StrategyImplementation
CompetitiveAdvantage
The Strategic Management Process
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GOAL
CONCEPTUAL OVERVIEW
The Environment -
Threats & Opportunities
Capabilities -
Strengths & Weaknesses
Managements values &attitude toward risk
STRATEGY
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Strategic Management
What isManagement?
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Strategic Management
What isManagement?
Leading
Controlling Planning
Organizing
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Strategic Management What is Strategic?
Important
Critical
Central
Long Term
What is Management? Setting goals and
objectives
Allocation of scarce
resources Orchestrating the behavior
of organizational members
Monitoring performance
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Examples of StrategicDecisions:
Should we enter a new market?
Should we introduce a new service?
Should we acquire a competitor?
Your decision to be here is strategic:
What college should I attend?
Should I get married?
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Important Terms
Top level managers making proactivedecisions regarding allocation of significant
resources which will have a decidinginfluence on the long-term performance ofthe entire organization as compared to its
competitors. Afterwards, orchestrating the
entire organization in implementing thedecision(s).
Strategic Management
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Important Terms
A firms theory about how to gain
competitive advantage
Unifying theme that gives coherence anddirection to individual decisions of an
organization.
Strategy
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The Environment -
Threats & Opportunities
Managements values &
attitude toward risk
Organizations resources
and capabilities -
Strengths & Weaknesses
GOAL
CONCEPTUAL OVERVIEW
Performance
Implementation Levers:
Organization structureSystems and processesPeople and rewards
Strategic Leadership:
Lever and resourceallocation decisions
Develop support amongstakeholders
STRATEGY
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Strategy Formulation &Implementation
Intended
STRATEGY
Realized &
Emergent
STRATEGY
Implementation Levers:
Organization structureSystems and processesPeople and rewards
Strategic Leadership:
Lever and resourceallocation decisions
Develop support amongstakeholders
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Nature of Strategy
Strategy leads to superior performance.
Clarity of direction
Ability to recognize opportunities
Ability to maneuver into a position ofadvantage
Focus: for-profit organizations, i.e. firms.
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Purpose of a Firm The purpose of a firm is to create valuethat
meets the needs of its stakeholders. Stakeholders: All the parties that have a stake(interest) in the success of a firm.
Owners/Stockholders
Employees
Customers
Suppliers
Governments
Local Communities
Trade Associations
Public at Large
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Stakeholder Group Examples of Value Provided
Stockholders Stock price appreciation and dividends
Customers Products and services
Employees Employment, wages, personal growth
opportunitiesSuppliers Revenue through sales, growth
opportunities
Local Community Jobs, economic development, civic
involvementSociety at Large Economic health and security,
environmental protection
Trade Associations Political strength, operating funds
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Stakeholder View of the Firm Fiscal Responsibility
Social Responsibility How can the firm meet its obligations to such a
diverse set of stakeholders?
The dominant objective of a business firm is tomaximize profits:
Meeting the obligations to stockholders is a prerequisite foraddressing the needs of other stakeholders in a serious
and sustained manner.Firms need to make a profit before they can devote their
attention to other concerns.
A business cannot exist without a positive cash flow.
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Profits Accounting Profits
Net Income
Economic Profits/Economic Rents/EconomicValue Added/Rents: Income that is surplusover and above the costs of all the inputsrequired for production. real profits most comprehensive and accurate ultimate measure
Net Income = EVA +Cost of Equity Cost of Equity: Total return to a portfolio of
stocks with similar risk. Proxies for EVA: ROA, ROE, Profit Margin.
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Sources of Profits
Choice of industries/businesses
---> corporate strategy: scope of the firmin terms of industries and markets in whichit competes.
Position of advantage vis-a-vis competitiveforces within a particular industry.
---> business/competitive strategy
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What is Strategy?Strategy answers the question How can the firm
make money?
Superior Profitability
How do we make
money?
Industry Attractiveness
Which industries should we
be in?
Positioning
How Should we compete?
Corporate
Strategy
Competitive
Strategy
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Levels of Strategy
CorporateStrategy
Business Strategies
Functional Strategies
Employees
Two-Way Influence
Two-Way Influence
Corporate-LevelManagers
Business-LevelManagers
Functional
Managers
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Features of Winning Strategies
Goal-Directed.
Based upon profound understanding of theenvironment in which the firm operates.
Based upon objective assessment of thefirms resources and capabilities.
Effectively implemented.
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Consistency is important
Consistency with the external environment
Consistency with resources andcapabilities
Consistency with organization structure
and systems Internal consistency
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Strategic ManagementPrinciple
A companys strategy ought to be
grounded in its resources and in
what it is good at doing (itscompetencies and competitive
capabilities); it is perilous to craft a
strategy whose success isdependent on resources and
capabilities that a company lacks!
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Strategic Management Principle
A companys strategy cant
produce real market success
unless it is well-matched to
industry and competitiveconditions!
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Strategic AnalysisIndustry analysis
Customer/marketplace trends
Environmental forecast
Competitor AnalysisAssessment of internal resources,
capabilities
SupportingOrganizational
ArrangementsStructure
Process
Symbols
RewardsPeople
Activities
Functional policies
and profiles
Objectives
Specific targets
Mission
Fundamental
purpose
Values
Strategy
The central
integrated
concept of how
wewill achieve our
objectives.
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SwissArmy Knives
What external forces influenced Victorinox,the manufacturer of Swiss Army Knives?
How did the company respond to theseforces?
What are some of Victorinoxs strengths?
Do you think Victorinox has a bright futuregiven its strategy?
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External Assessment
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Agenda for External Assessment
Forces in the general environments andtheir strategic implications
Determinants of industry profitability
Sources of competition in the industryenvironment
Strategic groups
Competitor appraisal
Industry segments
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External Assessment Defined
External Assessmentis the Gathering and
Analysis of Information About Relevant
Environmental Trends.
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MACROENVIRONMENT
The Economy
at Large
COMPANY
Suppliers Substitutes
Buyers
NewEntrants
RivalFirms
IMMEDIATE INDUSTRY
AND COMPETITIVEENVIRONMENT
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General/Macro Environment
Internal Environment
Our Business
Industry Environment
Segment, Strategic Group
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Why External Assessment?
External analysis allows firms to:
discover threats and opportunities
see if above normal profits are likely in an industry
better understand the nature of competition in
an industry
make more informed strategic choices
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External Assessment
The most difficult task to do yet the mostsignificant factor affecting a companys
success or failure.
Digital cameras to film
Computers and printers to typewriters
Singer
Proactive nature of StrategicManagement.
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Political/
LegalIndustry
Environment & Our
Business
Demographic Economic
Technological
Global
Sociocultural
General Environment Components
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Strategic Implication of Macro-Environmental Forces
The general environment affects entireindustries.
The same environmental trend can havedifferent effects on different industries.
The impact of an environmental trendoften differs significantly for different firms
within the same industry. Spotting trends before competitors may
lead to competitive advantage.
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Strategic Implication of Macro-Environmental Forces
Factors in the general environment may overlapand influence one another.
To identify major trends factors comprising the
general environment need to be systematicallyexamined: What environmental factors are affecting industries in
which we operate? In what direction?
Which of these are the most important in the presenttime? In the next few years?
What is their effect on our competitive position andperformance?
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Industry Analysis
What determines the level of profits in anindustry?
Potential Profits = Value - Cost.
Potential Profits are not equal to Actualprofits.
Profits earned by firms in an industry are
determined by:1. the value of products/services to customers.
2. the existence and strength of competitiveforces (Porters Model).
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Industry Analysis
1. Who are our customers? What do they want?How do they choose between competingsuppliers?
The key to winning long-term customers isto understand their wants and needs andsatisfy them better than competitors.
2. What are the forces driving competition? Howintense is competition? How can a firm obtainsuperior competitive position?
A d
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Agenda
Sources of competition in the industryenvironment
Key success factors of an industry
Strategic groups
Competitor appraisal
Industry segments
Competition at different stages of industry life
cycle Turn in info sheets and list of team members on
Thurs (Mar 8)
Fi F M d l f C i i
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Five Forces Model of Competition
Substitute
Products(of firms in
other industries)
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers ofKey Inputs
Buyers
Substitute
Products(from OTHER
industries)
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers ofKey Inputs
Buyers
Wh t i C titi Lik & H
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What is Competition Like & HowStrong Are the Competitive Forces?
To identify
Main sourcesofcompetitive forces
Strengthof these forces
Key analytical tool Five Forces Model of
Competition
Objective
How to Do It
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How to Do It
Explain how eachforce acts to create competitive
pressureWhat are the factors that cause eachforce to be strong or weak?
Assess strengthof each of the five competitiveforces (Strong? Moderate? Weak? ) Rivalry among competitors
Competition from substitute products
Competitive threat from potential entrants
Bargaining power of suppliers
Bargaining power of buyers
Decide whether overall competition (thecombined effect of all five competitive forces)isbrutal, fierce, strong, normal/moderate, or weak
Competitive Force of Substitute
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Competitive Force of SubstituteProducts
Substitutesmatter when customers are attracted tothe products/services of firms in
OTHER INDUSTRIESNOT from Other Competitors
Concept
Coffee vs. Tea vs. Coke
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
Newspapers vs. TV vs. Internet
Examples
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Porters Five Forces Model
Threat of Substitutes
substitutes fill the same need but in a different way
- Coke and Pepsi are rivals, milk is asubstitute for both
substitutes create a price ceiling because consumersswitch to the substitute if prices rise
substitutes will likely come from outside theindustrybe sure to look
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Are there substitutes for theproduct/service?
How willing are the customers to shift theirpurchases on the basis of changes inprice?
Competitive Force of SubstituteProducts
Principle of Competitive
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Principle of CompetitiveMarkets
The competitive threat of substitutesis strongerwhen they are:
Readily available
Attractively priced
Believed to have comparable orbetter performance features
Customer switching costs are low
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Porters Five Forces Model
Threat of Entry
if firms can easily enter the industry, any abovenormal profits will be bid away quickly
barriers to entry lower the threat of entry
barriers to entry make an industry more attractive
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Competitive Force of Potential Entry
Barriers exist when Newcomers confront obstacles
Economic factors put potentialentrant at a disadvantagerelative to incumbent firms
Effectiveness of entry barriersdepends on the resources andstrategies of new entrants.
Common Barriers to Entry
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Common Barriers to Entry
Capital requirements and/or other specialized resource
requirements Economies of scale
Cost disadvantages independent of size
Existence of learning/experience curve effects
Access to raw materials
Strong brand preferences and customer loyalty
Access to distribution channels
Regulatory policies, tariffs, trade restrictions Retaliation
Effectiveness of entry barriers depends on the resourcesand strategies of new entrants.
Principle of Competitive
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Principle of CompetitiveMarkets
Threat of entryis strongerwhen:
Entry barriers are low
Incumbents are unwilling or unable tocontest a newcomers entry efforts
Newcomer can expect to earnattractive profits
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Porters Five Forces Model
Threat of Rivalry
high rivalry means firms compete vigorouslyandcompete away above average profits
Industry conditions that facilitate rivalry:
large numbers of competitors
slow or declining growth
high fixed costs low product differentiation
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Porters Five Forces Model
Threat of Buyers powerful buyers can lower profitability of an industry
by demanding lower prices and/orhigher levels of quality and service
Industry conditions that facilitate buyer power:
small number of buyers
lack of a differentiated product
the product is significant to the buyer
the importance of the product to the quality of the buyersproduct
importance of the item as a proportion of total cost
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Porters Five Forces Model
Threat of Buyers
Industry conditions that facilitate buyer power:
buyers operate in a competitive marketthey arenot earning above normal profits
buyers can vertically integrate
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Porters Five Forces Model
Threat of Suppliers
powerful suppliers can lower profits
Industry conditions that facilitate supplier power:small number of firms in suppliers industry
highly differentiated product
lack of close substitutes for suppliers products
supplier could integrate forward
industry is an insignificant customer of supplier
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External EnvironmentAnalysis:
Trends in the
Macro-environment
Industry Analysis
Industry Attractiveness
Which industries should we
be in?
Positioning
How Should we compete?
Corporate
Strategy
CompetitiveStrategy
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General Prerequisites for Success
Supplying a product/servicewhich customers are willing to
pay a price that exceeds the cost
of production.
The ability to
survive competition
Analysis of Customers
&
Demand
Analysis of Competition
Key Success Factors
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Key Success Factors
Key Success Factors (KSFs): Specificperformance dimensions that a firm mustachieve to attract customers and to
survive competition. Sources of competitive advantage
Basis for business-level strategies
Identifying Industry
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Identifying IndustryKey Success Factors
Answers to two questions pinpoint KSFs On what basis do customers choose between
competing brands of sellers?
How can a firm survive competition in thisindustry?
KSFsconsist of afew really major
determinants of financial andcompetitive success in an industry
What are the Key Factors for
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What are the Key Factors forCompetitive Success?
Competitive elements most affecting everyindustry membersability to prosper
Specific strategy elements
Product attributes Resources
Capabilities
KSFsspell the difference between Profit and loss
Competitive success or failure
Common Types of
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Co o ypes oKey Success Factors
Distribution-
related
Marketing-related
Skills-related
Organizationalcapability
Other types
Technology-
related
Manufacturing-related
Scientific research expertise; Product innovation capability; Expertise
in a given technology; Capability to use Internet to conduct variousbusiness activities
Low-cost production efficiency; Quality of manufacture; High use offixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining amplespace on retailer shelves; Having company-owned retail outlets; Low
distribution costs; Fast deliveryFast, accurate technical assistance; Courteous customer service;Accurate filling of orders; Breadth of product line; Merchandisingskills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Designexpertise; Expertise in a particular technology; Ability to developinnovative products; Ability to get new products to market quickly
Superior information systems; Ability to respond quickly to shiftingmarket conditions; Superior ability to employ Internet to conductbusiness; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenientlocations; Pleasant, courteous employees; Access to financial capital;Patent protection
Example: KSFs for Beer
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Example: KSFs for BeerIndustry
Utilization of brewing capacity -- to keepmanufacturing costs low
Strong network of wholesale distributors -- to gain access to retail outlets
Clever advertising -- to induce beer
drinkers to buy a particular brand
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Dunkin Donuts
Evaluate the strength of each one of the 5forces
Evaluate the overall attractiveness of this
industry
Identify KSFs
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Competitor Analysis
Knowing ones competitors critical toeffective strategic management.
What does a firm need to know about its
competitors? Who are our competitors?
What are their strategies?
What are their objectives?
What are their assumptions?
What are their resources and capabilities?
Who are Our Closest
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Who are Our ClosestCompetitors?
One technique for revealing the differentcompetitive positions of industry rivals isstrategic group mapping
A strategic groupconsists of thoserivals with similarcompetitiveapproaches inan industry
Strategic Group Mapping
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Strategic Group Mapping
Firms in the same strategic grouphave two ormore competitive characteristics in common
Sell in same price/quality range
Cover same geographic areas
Be vertically integrated to same degree
Have comparable product line breadth
Emphasize same types of distribution
channels
Offer buyers similar services
Use identical technological approaches
Procedure for Constructing a
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gStrategic Group Map
STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from oneanother
distribution channels
product quality
degree of vertical integration
technology
price levels
level of advertising
product-market scope
level of customer service
Procedure for Constructing a
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gStrategic Group Map
STEP 2: Plot firms on a two-variable mapusing pairs of these differentiatingcharacteristics
STEP 3: Assign firms that fall in about thesame strategy space to same strategicgroup
STEP 4: Draw circles around each group,making circles proportional to size ofgroups respective share of total industry
sales
Example: Strategic Group Map of
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p g p pthe Video Game Industry
TypesofVideoGame
S
uppliers/Distrib
utionChannel
s
Overall Cost to Players of Video Games
Low(Coin-operated
equipment)
Medium(Video players
cost $100-$300)
High(Use PC)
Video Arcades,Coin-
OperatedMachines
Home PCs
Videogame
consoles
OnlineVideo game
sites
Sony, Sega,Nintendo, several
others
Arcadeoperators Publishers
of games onCD-ROMs
MSN Gaming Zone,Pogo.com,
America Online,HEAT, Engage,Oceanline, TEN
Guidelines: Strategic Group
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Guidelines: Strategic GroupMaps
Variables selected as axes should notbe highlycorrelated
Variables chosen as axes should expose bigdifferences in how rivals compete
Variables do nothave to be either quantitative orcontinuous
Drawing sizes of circles proportional to combined
sales of firms in each strategic group allows mapto reflect relative sizes of each strategic group
If more than two good competitive variables can
be used, several maps can be drawn
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Competitor Analysis
Competitors current strategy
Competitors objectives
Competitors assumptions about the
industry
Competitors resources and capabilities
WHAT ARE THEIR
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STRATEGIES?
Annual reports Public speeches of top management
Websites
What investments did they undertake recently? What hiring is taking place?
What new products are they developing?
What mergers/acquisitions/etc have theyundertaken recently?
What advertising campaigns have they
planned?
WHAT ARE THEIR
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OBJECTIVES?
Short-term financial goals versus long-term marketshare goals?
Other objectives: technological leadership, qualityleadership, cost leadership, etc.?
Is the competitor owned by a parent firm?
Run for growth or milked?
How much autonomy the subsidiary has? Are they satisfied with their current performance
level?
Categorizing Objectives
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Categorizing Objectivesand Strategies of Competitors
Competitive
Scope
StrategicIntent
Market ShareObjective
CompetitivePosition
StrategicPosture
CompetitiveStrategy
Local Be dominant
leader
Aggressiveexpansionviaacquisition &internalgrowth
Gettingstronger; onthe move
Mostlyoffensive
Regional Overtake
industryleader
Well-entrenched
Mostlydefensive
National Be among
industryleaders
Expansionvia internalgrowth
Stuck in themiddle of thepack
Combinationof offensive& defensive
Multicountry Move into
top 10
Expansionviaacquisition
Going after adifferentposition
Aggressiverisk-taker
Global
Move up a
notch inrankings
Hold on to
presentshare
Struggling;
losingground
Conservativefollower
Maintaincurrentposition
Give uppresentshare toachieveshort-termprofits
Retrenchingto a positionthat can bedefended Just survive
Striving forlow-costleadership
Focusing onmarket niche
Pursuingdifferentiationbased on
QualityServiceTechnology
superiorityBreadth of
product lineImage &
reputationMore value
for themoney
Otherattributes
Resources, Capabilities, &
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, p ,Assumptions
financial reserves capital equipment
work force
brand loyalty
management skills
assumptions
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Segmentation Analysis
Industries are heterogeneous
The nature and intensity of competition, aswell as needs of customers and KSFs vary
within industries.
Assess the attractiveness of differentsegments in terms of profits.
New entrants
Existing firms
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Steps in Segmentation Analysis
1. Identify key segmentation variables: Industries are segmented by applying
variables that subdivide the market into
discrete categories. First, identify the most appropriate variables
to use.
Segmentation variables are either thecharacteristics of customers or thecharacteristics of the product.
Examples to Segmentation Variables
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Type of Customers:
Industrial Customers Consumers
Government
Industrial Customers:
Size
Geographic Location
Industry
Technology Consumers
Demographic characteristics
Psychographic characteristics
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Examples to Segmentation Variables
Consumers
Benefits
User rate
Products
Physical size
Price level
Features
Technology/design
Performance
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Steps in Segmentation Analysis
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3. Analyze Segment Attractiveness:
Use the Five Forces Model.
Two differences:
competition from substitutes.
Ex. Station wagons - minivans
threat of new entrants
barriers to mobility protect a segment from invasion offirms from other segments.
4. Identify Segments KSFs
5. Analyze Advantages of Broad Vs. Narrow
Segment Scope
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Exploiting Industry Structure Opportunities
Generic Industry Structures
at any point in time, the structure of mostindustries fits into one of four generic categories
each industry structure presents opportunitiesthat may be exploited
Fragmented Industry Structure
Emerging Industry Structure Mature Industry Structure Declining Industry Structure
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Exploiting Industry Structure Opportunities
Emerging Industry Structure
Industry Characteristics Opportunity
new industry based on breakthrough technology or product
no product standard hasbeen reached
no dominant firm has emerged
new customers come from non-consumption not from competitors
first mover advantages
technology
locking-up assets
creating switchingcosts
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C ti f th F t
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Competing for the Future
What characteristics of emergent industries weredepicted in the VCR industry?
How did JVC attain a position of advantage?
What first-mover advantages did JVC secure? What characteristics of mature industries were
depicted in the Swiss watch industry?
What did SWATCH do attain an advantageousposition?
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Exploiting Industry Structure Opportunities
Fragmented Industry Structure
Industry Characteristics Opportunity
large number of small firms no dominant firms
no dominant technology
commodity type products
low barriers to entry
few, if any, economies of scale
Consolidation
buy competitors
build market power
exploit economiesof scale
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A d
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Agenda
Distinguish between resources andcapabilities
Define distinctive capabilities
Discuss role of resources and capabilitiesin strategy formulation
Identify the profit earning potential of
resources and capabilities
I t l A t
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Internal Assessment
Managers should not only focus on theexternal environment but also on theresources and capabilities of the firm.
Objectives Achieving strategic fit between the firms
resources and capabilities and its strategy
Ensuring that the firms resources are fullyexploited
Building the firms resource base
Resources of the Firm
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Resources of the Firm
1. Individual resources of the firm. E.g.equipment, skills of individualemployees, brand names, etc.
Tangible Resources
Intangible Resources
Human Resources2. Capabilities: Combinations of resources.
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Examples of Tangible Assets
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A manufacturing firms property and
equipment A telephone companys network of wire, cable,
and satellites
An entertainment companys library of oldmovies
A direct marketing firms mailing list
A natural resources companys landholdings A motel chains computerized reservation
system
A arts stores inventor
Gerber Products Co.
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Few firms can boast the kind of brand recognition, loyalty,and supermarket shelf space enjoyed by one company inparticular, one that made its name as a purveyor of muchsought-after foods like strained peas and pureed squash.When it comes time to feed their own children, generationsof American parents, themselves raised on Gerber babyfood, wouldnt buy anything else. The firm has a 75-yearhistory and commands more that 70% of the U.S. baby foodmarket. Gerbers competitors have tried to imitate fordecades with little success. Displacing the comfort andsecurity that adults experience when buying Gerber has
indeed proven difficult. In 1994, Gerber was acquired by theSwiss pharmaceutical firm Sandoz. At the time the networth of Gerbers assets, including its plants and inventory,was less than $300 million. However, Sandoz paid $3.7billion for Gerberalmost 33 times its annual profits
Intangible Resources
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ta g b e esou ces Reputation:
> main features: brands, relationships w/ customers,suppliers, and others, reputation of reliability, quality,being socially responsible
> key indicators: brand recognition, premium price,
scope of reputation.
Technological resources:> main features: stock of technology including
proprietary tech (patents, copyrights, trade secrets).> key indicators: number of patents, revenue formpatent licenses, R&D staff as a percentage of totalemployment.
Examples of Intangible Assets
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Examples of Intangible Assets
A research and development firmspatents
A restaurants secret recipe
A well known and trusted brand name
A firms good reputation
A unifying corporate culture
A high level of community support
A multinational corporations experience
with various national governments
Human Resources
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Human Resources
Main Characteristics: training, expertise,skills, adaptability, motivation,commitment, loyalty, communicative and
interactive abilities of employees. Key Indicators: educational, technical,
and professional qualifications, wages and
salaries.
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Organizational Capabilities
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Organizational Capabilities
Capability: A firms capacity to perform a
particular activity.
Managers should concentrate on thecapabilities that the firm does particularly wellrelative to its competitors.
Distinctive Capabilities / Competencies: Thoseactivities that a firm does particularly wellrelative to competitors.
ExampleC C l h id l i d l d
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Coca-Cola has a widely recognized logo anda distinctive red can with a trademarked
white wave image that goes around the can.Coca-Cola also has well established set ofreporting structures, reward systems,communications systems, and IT systems.
These are intangibleresources. Coca-Colahas access to substantial working capital(cash). This is a financial (tangible)resource. Coca-Cola has talented marketing
professionals. These are individual humanresources. Coca-Cola has the ability to putthese various resources together in aneffective marketing campaign. This is a
capability
Examples: Distinctive Capabilities
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p p
Sharp Corporation
Expertise in flat-panel display technology
Toyota, Honda, Nissan
Low-cost, high-quality manufacturing capability
and short design-to-market cycles Intel
Ability to design and manufacture ever more
powerful microprocessors for PCs Motorola
Defect-free manufacture (six-sigma quality) ofcell phones
Strategic Management
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Principle
A distinctive capability
empowers a company tobuild competitive
advantage!
How to identify capabilities?
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How to identify capabilities?
Internal Audit (Functional Approach)classifies the capabilities with respect tothe functional areas they pertain to.
Value-Chain Analysisdivides the business into a set of linkedactivities that may each produce value for
the customer.
Internal Audit
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Every firm has certain functions that it
must perform.
Some common functions:
production/operations
marketing
R&D
financial management/accounting
HR management
general management
IS
Internal Audit
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Involves a thorough assessment of eachone of the functional areas.
Diagnostic questions
Results in identification of capabilities thatthe firm has developed in each area.
Advantage:
Very flexible.
Internal Audit
Internal Audit Questions Production/Operations
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Production/Operations Does the firm have effective inventory control policies and
procedures?
Does the firm utilize quality control procedures? Are they effective?
How does the firm do on on quality assessments?
Does the production/operations procedures work smoothly and withlittle disruptions?
Have production/operations goals been established, and are workactivities aimed at achieving these goals?
R&D Are the firms products technologically competitive?
Is communication between R&D and other units effective?
Is development time form concept to actual product appropriate?
How many products have been developed during the last year?
Financial/Accounting Are the firms capital budgeting procedures effective?
Has the firm established financial oals? Are the a ro riate?
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The Value Chain Analysis
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The firm can be divided into a number oflinked activities that each produces value forthe customer.
Focus: Creating customer value.
An activity can help the firm differentiate itsproduct.
An activity can help the firm lower its costs.
All activities of a firm can be categorizedinto:
Primary Activities
Support Activities
Typical Company Value Chain
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yp p y
DistributionAnd
OutboundLogistics
Operations
PurchasedSupplies
andInboundLogistics
Sales andMarketing
ServiceProfit
Margin
Product R&D, Technology, Systems Development
Human Resources Management
General Administration
Primary Activities and Costs
SupportActivitiesand Costs
The Value Chain Analysis
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Primary Activities:
Inbound logistics: Warehousing, materialshandling, inventory control.
Operations: Machining, assembly, molding,testing.
Outbound logistics: Finished goodswarehousing, order processing, transportation.
Marketing and sales: Advertising, distribution of
catalogs, direct sales, distribution channeling,promotion, pricing.
Service: Repairing, supplying parts, installation.
The Value Chain Analysis
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Support Activities: Procurement: Actual purchase of inputs.
Technology Development: Learning processes
that results in the improvements in the wayorganization functions.
HR Management: Recruiting, hiring, training,compensation.
Firm Infrastructure: Planning and accounting
The Value Chain Analysis
Questions for Value Chain Analysis
I b d L i ti
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Inbound Logistics Is there a materials control system? How well does it work?
What type of inventory control system is there? How well does itwork?
How efficiently are raw materials handled and warehoused?
Operations How productive is the equipment compared to competitors?
Are production control systems in place? How efficient and effectiveare they?
Is the firm using appropriate level of automation?
Outbound Logistics
Are finished products delivered in a timely fashion to customers? Are they delivered efficiently?
Are they warehoused efficiently?
Questions for Value Chain Analysis Marketing and Sales
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Marketing and Sales Is marketing research effectively used to identify customer segments?
Are sales and promotion innovative?
Have alternative channels of distribution been evaluated?
Does the firm present an image of quality?
How brand loyal are the customers?
Customer Service How promptly and effectively are customer complaints handled?
Are our product warranty and guarantee policies appropriate?
How well does the firm provide replacement parts and repairservices?
Procurement Has the firm developed alternative sources for obtaining the
resources?
Are resources procured in a timely fashion? At lowest possible cost?At acceptable quality levels?
Has the firm established sound lon -term relationshi s with su liers?
Technology DevelopmentI th l ti hi b t R&D l d th d t t
Questions for Value Chain Analysis
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Is the relationship between R&D employees and other departmentsstorng?
Have the technology developments been able to meet the criticaldeadlines?
How successful have R&D activities been in product and processinnovations?
HR Management
How effective are the firms procedures for recruiting, selecting, andtraining?
Are there appropriate promotion policies in place, are they usedeffectively?
How appropriate are reward systems?
Firm Infrastructure Does the strategic planning system facilitate and enhance the
accomplishment of goals?
Can we obtain low cost funds?
Does IS provide timely and accurate information?
Resources, Capabilities, and Profits
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Relevant: Is the resource valuable? Scarce: Is the resource widely available?
Durability: How quickly is the advantage
depreciated? Mobility: Can the resource be bought and
sold or transferred?
Imitability: Is it hard to copy? Substitutability: Are there viable
alternatives
Resources, Capabilities, & Profits
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relevant scarce
durability
mobility
imitability
substitutability
Profit potential
Sustainability of profits
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YES
NO
ResourcesInputs to a firms
production process
Capability
Integration of ateam of resources
BETTER than
competitors?
CostLeadership
ORDifferentiation
A Non-Strategic
capability/resource
Sustainable
CompetitiveAdvantage
Business-LevelCorporate-Level
StrategiesPasses 6 criteriatest
YES
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Business Strategy &
Competitive Advantage
Agenda
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Agenda
Define key terms Business strategy
Competitive advantage
Competitive scope
Discuss Porters generic strategies
View and discuss M. Porter on
Competitive Strategy video series Discuss Best-Cost Strategy
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Competitive Advantage &Competitive Scope
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Competitive Scope
Competitive Advantage: The ability tooutperform rivals on profitability.
Cost advantage
Differentiation advantage Competitive Scope: The breadth of target
within which the firm seeks to gain a
competitive advantage. Broad scope
Narrow scope
The Generic Competitive Strategies
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Ma
rketTarge
t
Type of Advantage Sought
Broad Cost-Leadership
Strategy
BroadDifferentiation
Strategy
FocusedCost
Strategy
FocusedDifferentiation
Strategy
Best-CostProviderStrategy
Lower Cost Differentiation
BroadRange of
Buyers
NarrowBuyerSegmentor Niche
Ivory Soap
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Ivory Soap
Introduced as a differentiated product
In 1950s positioned as the cost leader
What are the requirements to pursuedifferentiation advantage?
What are the requirements for cost
leadership? How did Ivory develop a significant costgap over its rivals?
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Generic Strategies
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Cost-Leadership /
Low-Cost Strategy
A generic business strategy
in which a businessproduces, at the lowest
cost possible, no-frills
products and services
industry-wide for a large
market
Cost
Differentiation
Ivory
Today
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Cost Leadership
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Unique position
What does it take to be the cost leader?
Good product
standard but acceptable quality
appeals to large percentage of themarket (broad cost leadership)
Opening up significant and sustainablecost difference
Command prices at or close to industryaverage
Securing a Cost Advantage
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Do a better job than rivals of
controlling the Cost Drivers
Approach 1
Redesign value chain to
bypass some cost-producing
activities
Approach 2 Controlcosts!
By-passcosts!
Approach 1: Controlling the CostDrivers
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Drivers
Capture scale economies Capture learning and experience curve effects
Manage costs of key resource inputs
Find sharing opportunities with other business units
Compare vertical integration vs. outsourcing
Assess first-mover advantages vs. disadvantages
Control percentage of capacity utilization
Make wise strategic choices related to operationsE.g. Product features, Mix & variety of products, Service levels, Wage levels
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Other requirements for Cost-Leadership
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Leadership
Access to capital Process engineering skills
Close supervision, detailed job
specifications, high formalization Compensation and rewards based on
quantitative targets
Strengths in manufacturing, distribution,technology, and managerial control.
Low-Cost Characteristics
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Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs Programs promoting continuous cost
improvement
Investments in cost-saving improvements
Risks of Low-Cost Strategy
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gy
Preoccupation with cost reduction cancause the firm to miss required product ormarketing changes.
Technological breakthroughs caneliminate cost advantages of the costleader.
Effective Cost Leaders can MITIGATE theFiveForces to remain profitable
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Threat ofNew
Entrants
Bargaining
Power of
Suppliers
Threat of
Substitute
Products
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Can mitigate Supplier Power by:
Low cost position makes them betterable to absorb cost increasesMore likely to make very largepurchases which reduces chance of
supplier power
Well positioned relative to Substitutes in
order to:
Lower prices to maintain value position
Can frighten off New Entrants due to
the need to:
Enter at Large Scale to be CostCompetitive
Take time to move down the LearningCurve
Can mitigate Buyer Power by:
Driving prices far below competitorswhich may cause exit and shift power
back to the firm
Effective Cost Leaders can also succeed INSPITE of unattractive FiveForces
Powerful Suppliers can:
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Threat ofNew
Entrants
Bargaining
Power of
Suppliers
Threat of
New Entrants cannot make a profit
compared to Low Cost Leader
Substitutes Place a Price Ceilingon the Industry.
LCL fit b tt th th
RivalsCant absorb costs of price
wars or marketing blitzes
as well as the LCL.
Powerful Buyers can:Demand Lower Prices
Demand Higher Quality
Bargaining
Power of
Buyers
Powerful Suppliers can:
Raise their Prices
Lower their Quality
LCL can absorb these COST
increases better than others as long as
the source of their cost advantage is
not based on inputs.