Chapter 4-8 Flashcards
How is the relationship between a firm and customers determined?
- Reach – access and communication to customer
- Richness – deep and detailed two-way communication
- Affiliation – facilitating useful relationships with customers
What factors can be used to segment customers?
- Consumer market
- Business Market
Which customer needs does a firm satisfy
- Have close and frequent interactions with customers
- Decide whether to focus on cost or differentiation
- Have way to anticipate changes in customer needs
What core competencies does a firm need to satisfy ?
- Improve capabilities to meet existing customers needs
- Find ways to meet needs of potential new customers
What is the purpose of business level strategy?
To create a difference between firm and competitor’s position
- Perform activities differently
- Amazon vs. Borders or Barnes and Noble
- Southwest Air
- Perform different activities
What are the five basic strategies?
- Cost leadership
Differentiation
Focused cost leadership
Focused differentiation
Integrated cost leadership/differentiation
What is cost leadership?
- Need to produce acceptable product
- Go after broad segment
- Continuously look for ways to lower cost
- Economies of scale
- Use value chain analysis
What is differentiation strategy?
- Target customers with products or services different from a competitors
- Innovation is critical
- Customers value differentiated features more than cost
- Need to constantly upgrade features
How can firms differentiate?
- Product
- Reliability
- Convenience
What is a focused strategy?
- Firm focuses on a particular competitive segment
- Particular group
- Different segment of a product line (professional vs. consumer)
- Different geographical market
What is integrated cost leadership/differentiation strategy?
- Firms try to be both low cost and highly differentiated
- Needs to be good at more activities (example Target says “expect more, pay less”)
- But very difficult to be good at everything and you can end up “stuck in the middle”
What are the risks of integrated cost leadership/differentiation strategies?
- Difficult to do both at same time
- Unable to figure out primary activities and how to support them
- Fail at either and become stuck in the middle
A business’s superior profitability arises from?
- Being in an attractive industry
- Establishing a competitive advantage over rivals
What are the key factors needed for success?
- Firms resources and capabilities determine whether it can find a way to perform better than its rivals and sustain that advantage
- Competition provides incentive to develop a competitive advantage but also erodes it
Provide examples of competitve advange
- Wal-Mart – discount retailing
- Toyota – mass produced vehicles
- SAP – enterprise resource planning software
- Apple – tablets, smartphones, digital music
Competitive advantage allows a firm to earn if it chooses to do so at a persistent higher rate of profits..
- A firm may not choose to take that profit but rather invest it in market share
- Firms have the flexibility on they will use the extra profits
- Balance between financial goals including strategic and future goals
Competition tends to eliminate differences in profitability (trend towards perfect competition)
- Competitive advantage disrupts this by changing the competitive dynamic.
- Changes in the external world are addressed by the different resources and capabilities of different firms
The magnitude of the competitive shift depends on both the magnitude of the change and the difference in the competing firms capabilities, why?
- Where an industry is turbulent and undergoes frequent changes (i.e. mobile telephones) there is a greater dispersion of profitability as more differences between the firms
How quickly a firm responds to external changes (including strategic attacks) is a key factor in whether it will benefit from that change (“time based competition”)?
- Firms should try to anticipate changes
- Acquire the pertinent information
- Act quickly
- Compare products with long life cycles with one with short life cycle and the different capabilities each need to develop to be successful
What are the two types of markets?
- Trading – involve trade and speculation
- Production – changing inputs into outputs (products)
How are trading markets efficient?
- Perfect competition
- All information is available
- Examples are financial and commodity markets
- Differences in profits from level of risk taken or randomness (Luck)
For competitive advantage to exist an imperfection must occur, why?
- Imperfect availability of information (insider trading, arbitrage)
- Transaction cost differences
- Systemic behavioral trends
How does strategic innovation can create competitive advantage?
- By creating value from:
- Newl products and experiences or modes
- Redesigning processes and novel organizaitional designs
Innovation strategies usually involve?
New industries (Xerox, wireless phones) or new customer segments (home computers/Apple, movies for home viewing).
New sources of competitive advantage come from changes in industries value chain
Example: Canon created a competitive advantage by offering smaller wet toner copiers while Xerox focused on larger, dry toner copiers
Competition erodes competitive advantage by competitors copying or by innovating
- Firms create barriers (“isolating mechanisms”) slow this erosion
- Rivals imitate competitive advantage
How can firms that possess a competitive advantage protect it at each step?
- Identification – obscure superior performance
- Incentive – deter imitation by punishing rival or preempting rival by moving in niches to remove opportunity
- Diagnosis – create causal ambiguity
Base competitive advantage on resources that are immobile or difficult to replicate
- Resource may not be available at a reasonable cost (Fuji water)
- Creation can take a lot of time (installing lean manufacturing)
- Be the first mover and gain that advantage (though first mover advantage can be overcome)
What are the steps in competitive analysis?
- Nature and extent of rivalry
- Whether competitor will take strategic action or respond strategically
- Likelihood of attack or response.
How to assess the nature and extent of rivalry?
- Market commonality – in how many markets do firms compete
- Resource similarity – do they use similar resources
How to assess whether competitor will take strategic action or respond strategically?
- Awareness
- Motivation
- Ability
How to assess the likelihood of attack or response?
- When firm is First movers
- Lots of a firms customers are targetted
- Firm is smaller
- Firm has developed a unique way to compete
- Quality is an issue
Whether a firm responds to a strategic attack depends upon?
- Type of competitive advantage
- Actor’s reputation
- How dependent on the market the firm is
What is competitive dynamics?
Actions and responses of all the competitors in a market
What are slow-cycle markets?
- Imitation is difficult
- Competitive advantage can be sustained for a very long period
- Resources and capabilities need to be protected
What are fast-cycle markets?
- Imitation rapid and inexpensive
- Hard to manage
- Pace of competition frenzied
- Competitive advantage not sustainable
- Focus on developing new innovative products
What are standard –cycle markets?
- Competitive advantage partially shielded from imitation
- Competitive advantage somewhat sustainable
- Attacks designed to go after large market share
- Competition for market share is intense
What is corporate strategy?
Involves the scope of the firm in terms of the industries and markets in which it competes (“the where”)
What are the different methods for corporate strategy?
- Vertical scope
- Geographical scope
- Product scope
Why are corporate strategies used in firms?
To diversify from one product in a single market to multiple product markets
How firms who diversify gain a competitive advantage?
- By selecting and managing a group of different businesses competing in different product markets
- Use of corporate strategy to grow their revenue and profits
Corporate strategies is also concerned with?
- How corporate headquarters should manage those businesses
- Help the firm earn above average returns
What are the different levels of corporate diversification?
- Low level of diversification
- Moderate and high level of diversification
- Unrelated diversification strategy
Corporations chose to diversify to create value through?
- Economies of scope
- Market power
- Financial economies
Why do managers choose to diversify?
- Higher compensation
- Reduce managerial risk
What are financial economies?
Firms can efficiently allocate capital more than capital markets
The central issues of corporate strategy involves how the firm addresses the where by assesing?
- Economies of scale in resources and capabilities
- Transaction costs
- Cost of more corporate complexity
How can firms organize?
- An administrative mechanism regarding production and resource allocation
- A market mechanism involving transactions with others
When do firms exist?
When they are more efficient than organizing production through contracts between self-employed workers
How can a firm choose to do some activities?
- The firm itself (vertical integration)
- The market (outsource)
Which activities should it choose?
- Much depends on the relative cost of doing the activity
- Each has costs associated with it
- There are other considerations
What does a typical market costs include?
- Search costs
- Negotiating and preparing contracts
- Monitoring to ensure compliance and quality
- Enforcement costs
How to choose between administrative and transaction costs?
If the administrative costs are less than transaction costs, the firm should do the activity within the firm
Which is better: one firm or several independent firms acting in linked fashion?
In 19th century and most of 20th century, firms absorbed transactions that had previously taken place across markets
- Firms became integrated, diverse and multinational
- Firms were more efficient
What happened toward the last decades of the 20th century?
A trend reversed with respect to product and vertical scope - geographical expansion continued
Product and vertical scope reversal means that market transactions are considered more efficient (market costs lower)
- Business environment turbulent
- Cost more to remain flexible
- Able to respond quickly if activity within firm
- Information and communications technology less costly
- technology is widely available to all companies
What is vertical integration?
Firms ownership of vertically related activities
What does vertical integration do?
- Look at the firm’s value chain and see which it does itself
- Which it obtains from other parties
- The less activities are brought into the firm from outside, the higher its ratio of value added
- Can be forward or backward
- Can be full or partial
What are the technical economies that come from vertical integration?
The cost savings that arise from the physical integration of plants
Physical integration of plants
- Near-by raw materials enter integrated plant and finished, ready-to-ship product exit
- But savings may come from common location and not common ownership
Why have the last 25 years outsourcing (market transactions) gained favor?
- Enhances flexibility
- Allows focus on what firm does best
- Communications and IT facilitates coordination between firms
During most of 20th century vertical integration within a firm looked on favorably, why?
- Allowed superior coordination
- Reduced risk
Where is vertical scope most comon?
- In product’s value chain that some activities are done through market contracts
- Others that are done through vertical integration
Vertical Scope
- Most producers don’t mine or grow raw materials or distribute to consumers directly
- Technical economies that may cause one firm to do an activity but not others
- Market transactions may not be feasible
- Market transaction may be difficult to structure or put one party at the mercy of the other
- Future unknowable and risk shifted to other firm
What is internalization?
- Imposes administrative costs
- Differences in optimal scale between different stages of production
- Different size firms may reach different results
- May not be able to develop capabilities to level of specialized firm which works with many companies
- Capabilities that build on each other can be developed into a distinctive capability that provides competitive advantage by vertically integrated them
What are some of the issues arising from managing different businesses?
- Skills and systems needed may be different
- Strategic dissimilarities push toward no integration and even divestiture
- Whether employees can be given incentives
- Integration may impact whether competitors may stop dealing with a part of the firm
Using market transactions may assist where?
- Markets are uncertain
- New products require multiple technologies (smartphones)
- But may cause delay and inefficiency when speed and efficiency are needed as no contracts to negotiate
Why market transactions may reduce risk for a vertically integrated business?
A problem at one stage may threaten profitability in all
There are many vertical relationships that can be formed using market transactions
- Commitments can be of varying strengths and formality
- Relationship can be from very simple sales contract to long-term relationship where information is shared
What are other factors to consider in choosing between vertical integration and a type of vertical relationship?
- How important for the firm’s strategy and building resources and capabilities is it to keep activity within the firm
- Allocation of risk as market transaction may place risk outside of the firm (part of the negotiated terms)
- Incentive structures as a long-term relationship acts as a powerful incentive to perform well
Why there is a recent trend is toward a hybrid relationship?
- Flexibility and incentives from market transaction
- Close collaboration found in vertical integration
- Long-term relationship
- Trust building
- Strategic alliances
- Equity investments
Why are market transactions still common?
- Internet pushes toward looser relationships
- Outsourcing not only of components but also services
- Virtual companies that outsource everything
Why pursue vertical scope?
- It depends on the firms competitive strategy and capabilities
- The firm needs to evaluate its strategic needs,
- Resources and capabilities at different points of the value chain,
- Characteristics of the transaction
- Relative attractiveness
What are the key factors in diversification scope?
- Firm’s resources and capabilities
- Whether it can exploit these resources and capabilities to establish competitive advantage in another industry
- Which industries are suitable for it to enter
What are the decisions when considering diversification?
- Attractiveness of industry
- Can firm establish a competitive advantage
Whether operating multiple businesses will gain firm an advantage in each (that is, whether there is “synergy”)
What is the emphasis from 1980 to today businesses ?
- Refocusing on the core and divesting non-core businesses
- Shareholder value
- Volatile business climate requires more agility than possessed by large, diverse firms
- New management thinking
What is Porter’s Three Tests as to whether diversification creates shareholder value?
- Industry must be structurally attractive
- The cost of entry must not capitalize all the future profits
- Either the new unit or the old must gain competitive advantage from linking the new unit to the corporation (key test)
Why diversify? What are the competitive advantages from diversification?
- Economies of scope
- Better information sharing
- Better use of employees
Why diversify? What are the alternatives?
- Licensing or use other market alternatives
- Preferable to firm entering new business itself
- Think of licensing activities of firms
Why diversify? What does the data show?
- Diversifications that exploit economies of scope in resources and capabilities can create shareholder value
- Diversification that only seek growth or risk reduction, likely destroys value
- Some diversification is valuable but only up to a certain level
What is globalization?
- Global markets are relatively unstable and unpredictable
- International strategy means a firm is selling goods or services outside of its domestic market
Two basic geographical scope questions?
- Whether and where to enter into foreign markets?
- How to enter into a foreign market?
What does internationalization means?
More competition and lower profits
- Barriers to entry have fallen
- More competitors and less concentration
- Global sourcing means increased bargaining power for buyers
What are some of the reasons firms expand internationally?
- Extend a product’s life cycle
- To get easier access to raw materials
- Global operations more efficient
- Better use of developing technologies
- Gain access to new customers
What are the benefits of an International Strategy?
- Increase market size (bigger pie)
- Economies of scale and learning (especially economies of scale in manufacturing)
- Location advantages (raw materials and lower labor costs
Why is it difficult to operate in a foreign country?
- Unfamiliar operating environment
- Administrative and cultural differences
- Challenge to coordinate over distances
How does a national environment impacts a firm access to its resources and capabilities?
- National raw materials
- Culture
- Transportation and communication infrastucture
- Government policies
- Exchange rates
- Market conditions in nation
How can firms enter the international market?
- Transactions (shipping from outside, outsourcing)
- Direct investment
How can a firm enter into a foreign country?
- Export
- Licensing
- Strategic Alliances
- Acquisitions
- New wholly owned subsidiary
While global firms have certain advantages, national differences in customer preferences still matter, what are they?
- Common platforms may be most efficient way
- Culture differences need to be taken into account
- It is a major challenge for a firm to reconcile global integration and strategy with national differentiation
- Organizational structure of multi-national corporation is important (but beyond scope of course)
Why firms use M&A?
To create shareholder value but:
- M&A is challenging
- Benefit often goes to target company shareholders
- Premium is often too high
What is a Merger?
When two firms integrate their operations on relatively coequal basis
- Acquisition – one firm buys another
- Takeover – an unfriendly acquisition
What are the reasons for acquisitions?
- Increased market power
- Overcoming entry barriers
- Cost of new product development and speed to market
- Increased diversification
- Reshaping of firms
- Learning and Development of new capabilities
What is the percentage of successful acquisitions?
- Only 20% of acquisitions are considered successful
- 60% disappointing
- 20% outright failure
What are the reasons M&A are problematic?
- Integration difficulties
- Inadequate evaluation of target
- Large debt
- Inability to achieve synergy
- Too much diversification
- Managers spend too much time on acquisitions
- Too large
When are acquisitions sucessfull?
- There are complimentary assets
- Acquisition is friendly
- Effective due diligence
- Firm has financial ability to what is needed
- Low debt position
- Firms emphasis innovation and R&D
- Managers are flexible and adaptable
Competitive advantage arises from a firm..
Being able to meeti the key factors needed for sucess.
What determines wheter a firm can perform better than its rivals?
Firms resources and capabilities.
Production markets tend to be highly differentiated as the activities are complex…
- Firms possess unique combinations of resources and capabilities
- Firms can position themselves differntly from leader to gain their own CA rather than just imitate
What is disruptive technology?
An innovation that makes it so much simpler and more affordable to won and use a product. Examples:
- Xerox disrupted by Canon
- Apple’s iPhone gaming
How do rival firms imitate comptititve advantage?
- Identifying that a CA exists
- Having an incentive to do so
- Diagnosing what features gave rise to the CA
- Obtaining or replicating the needed resources and capabilities
What is vertical scope?
The range of vertically linked activities done within the firm.
What is geographical socpe?
Locations in which the firm competes
What is product scope?
Wheter the firm competes in a single industry or multiple industries.
What is a low level of diversification
When there is a dominant business
What is moderate and high level diversification?
- Dominant business less important
- Resources and activities are shared
What is unrelated diversification strategy?
Conglomerates:
- No relationship between business
- Managed by holding company structure
What is the Boston Consulting Matrix
Compares market growth rate to market share
- Stars (Focus and prioritize)
- Cash Cows ( Provide cash)
- Question Marks (Need to move strategically)
- Dogs (Turn-around or liquidate)
What are economies of scope?
Cost economies from increasing the output of multiple products (synergy)
Examples of economies of scope
- Tangible resources can be combined to eliminate duplication or combined into a shared service group
- Intangible resources like brands can be exploited
- Organizational capabilities can be utilized over a wider product line and increased revenue base
