Chapter 5 - Organizational Strategy Flashcards
Resources
the assets, capabilities, processes, information, and knowledge that an organization uses to improve its effectiveness and efficiency, create and sustain competitive advantage, and fulfill a need or solve a problem
Resources are vital to an organization’s ________ because they can help companies create and _________________
Resources are vital to an organization’s strategy because they can help companies create and sustain an advantage over competitors.
competitive advantage
providing greater value for customers than competitors can
competitive advantage - example info
the newest iPod’s competitive advantages continue to come from its simple, attractive design relative to its price. But Apple’s most important advantage was being the first company to make it easy to legally purchase music online. Remember that prior to the iTunes store at iTunes.com; the only way to acquire digital music was by illegal file sharing. Apple negotiated agreements with nearly all of the major record labels to sell their music, and iTunes.com quickly became the premier platform for music downloading. Apple was a computer company, not a music company. Even so, it was able to use its resources to create a competitive advantage with an easy-to-understand site that provided free downloadable software for customers to use when organizing and managing their digital music libraries.Footnote What will Apple do now that Spotify is on the market, giving you unlimited songs for $10 per month?Footnote Well, “Apple Music” might be a strategic answer, and Apple has sold more than a billion iOS devices and maybe those iOS users will purchase Apple Music (also at $10/month).Footnote Even allowing for those Apple iOS devices no longer in use, and multiple devices owned by the same customers, that’s a lot of customers. Additionally, thanks to extremely high adoption rates of new iOS versions, those customers will automatically be exposed to Apple Music.Footnote Both companies are also trying to get strategic deals with automobile companies to have their systems installed as original equipment on new vehicles.
sustainable competitive advantage
a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate
Sustainable competitive advantage is not the same as a long-lasting competitive advantage, although companies obviously want a competitive advantage to last a long time. Rather, a competitive advantage is sustained if competitors have tried and failed to duplicate the advantage and have, for the moment, stopped trying to do so. It’s the corporate equivalent of your competitors saying, “We give up. You win. We can’t do what you do, and we’re not even going to try to do it anymore.”
Jay Barney introduced the VRIO framework, which stands for four questions asked about a resource (or capability)
Is it valuable?
Is it rare?
Is it costly or difficult to imitate?
Is the firm organized to capture the value of the resources?
A resource or capability that meets all four requirements can bring sustained competitive advantage for the company.Footnote Exhibit 5.2 shows a graphical depiction of the VRIO framework.
Valuable resources
resources that allow companies to improve efficiency and effectiveness
Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. Also, for competitive advantage to be sustainable, the valuable resources must also be rare.
How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities?
rare resources are necessary in order to sustain a competitive advantage
rare resources
resources that are not controlled or possessed by many competing firms
When Apple introduced the iPod, it was unique. The technology that powered the iPod was readily available, however, so competitors were able to quickly imitate iPod’s basic storage capacity. As competitors began introducing iPod look-alikes, Apple released new models for the iPod Touch, Nano, or Shuffle, the iPad Air 2, and the iPad Mini 3. With Wi-Fi and two cameras, these latest devices have the ability to play on-demand songs, surf, text, make phone calls, or open Skype as long as you have an Internet connection through Wi-Fi or a G4 chip.
Imperfectly imitable resources
resources that are impossible or extremely costly or difficult for other firms to duplicate
Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if the firm is organized to capture the resources’ value.
The resources do not confer any advantage for a company if it’s not _________ to capture the value from them.
Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if the firm is organized to capture the resources’ value. The resources do not confer any advantage for a company if it’s not organized to capture the value from them.
A firm must organize its management systems, processes, policies, organizational structure and culture to be able to fully realize the potential of its valuable, rare, and costly to imitate resources and capabilities. Only then the companies can achieve sustained competitive advantage.
In order to produce sustainable competitive advantage, a company must have a ________.
In order to produce sustainable competitive advantage, a company must have a strategy.
With customers’ needs constantly growing and changing, and with competitors working harder, faster, and smarter to meet those needs, the first step in creating a strategy is to determine the need for ____________.
the first step in creating a strategy is to determine the need for strategic change.
In other words, the company should determine whether it needs to change its strategy to sustain a competitive advantage.
There’s a great deal of __________ in strategic business environments.
There’s a great deal of uncertainty in strategic business environments.
top-level managers are often _______ to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages.
top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages.
top-level managers are acutely aware of the strategies that made their companies successful, so _______________________________
top-level managers are acutely aware of the strategies that made their companies successful, so they continue to rely on those strategies even as the competition changes.
success often leads to ________________
success often leads to competitive inertia
competitive inertia
a reluctance to change strategies or competitive practices that have been successful in the past
Besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of ________________.
Besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance.
Strategic dissonance
a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy
Strategic dissonance can indicate that managers are not doing what they should to carry out company strategy; but it can also mean that the intended strategy is out of date and needs to be changed.
A _______________ can help managers determine the need for strategic change.
A situational analysis can help managers determine the need for strategic change.
situational analysis (SWOT analysis)
an assessment of the Strengths and Weaknesses in an Organization’s internal environment and the opportunities and Threats in its external environment.
SWOT analysis helps a company determine how to increase ____________ and minimize ___________ while maximizing ____________ and minimizing external threats.
SWOT analysis helps a company determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats.
It is important to note that external factors that are positive in nature are ________; negative external factors are called _________.
It is important to note that external factors that are positive in nature are opportunities; negative external factors are called threats.
The internal assessment often begins with an assessment of its ___________ and ____________
The internal assessment often begins with an assessment of its distinctive competencies and core capabilities
distinctive competence
what a company can make, do, or perform better than its competitors
For example, Consumer Reports magazine consistently ranks Toyota cars number one in quality and reliability. Similarly, PC Magazine readers ranked Apple’s desktop and laptop computers best in terms of service and reliability.
Core capabilities
the internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs
Distinctive competencies cannot be sustained for long without superior core capabilities.
Core capabilities - example
Offering Asian food products is a distinctive competency at T & T Supermarkets. At these stores, one can find every kind of Asian food imaginable. Most of the products T & T sells are exotic and unique. This company’s goal is to enrich the lives of Asian families in Canada by offering them choice foods and household items in a comfortable shopping environment. It also hopes to introduce the colourful Asian food culture to Canada’s multicultural society. “Freshness” is its most important operating value, one that it practises along with “customer satisfaction” to enhance its one-stop shopping convenience and personable service standards. This is an example of a focused differentiated approach. T & T Supermarkets is just one of Loblaw’s acquisitions that were meant to enhance Weston’s corporate strategy.
In a situational analysis, managers use ______________ to identify specific opportunities and threats that can either improve or harm the company’s ability to sustain its competitive advantage.
In a situational analysis, managers use environmental scanning to identify specific opportunities and threats that can either improve or harm the company’s ability to sustain its competitive advantage.
PESTEEL analysis
analysis of the Political, Economic, Social/demographic, Technological, Environmental, External-employee, and Legal factors that affect a company and shape the company’s strategy
Political forces include…
Political forces include government trade agreements, taxation, government ownership, and globalization issues.
Economic forces include…
Economic forces include interest rates, exchange rates, gross domestic product (GDP) and other general economic indicators, unemployment, and other factors over which a company has no control.
Social and demographic factors include…
Social and demographic factors include age, ethnicity, housing, purchasing psychometrics, and other changes or trends that affect consumer behaviours.
Technological factors include…
Technological factors include new processes, new methods, new discoveries, and new ways of communicating, again, none of which a company can control.
Environmental factors include…
Environmental factors include effect on climate, waste, impact on nature, air/water/ ground pollution, and energy usage.
External-employee factors include…
External-employee factors include concern for employees all the way down the chain (global suppliers), fair wages, providing healthy and safe work environments, providing workplaces free from harassment and discrimination, and employee assistance programs.
Legal factors would include…
Legal factors would include laws and regulations that affect companies, compliance with provincial and federal laws (labour laws), international law, and legal obligations for things like pipelines and mining in Canada or other countries.
shadow-strategy task force
This strategy involves a company actively seeking out its own weaknesses and then thinking like its competitors, trying to determine how they can be exploited for competitive advantage.
To formulate effective strategies, companies must be able to answer these three basic questions:
What business are we in?
How should we compete in this industry?
Who are our competitors, and how should we respond to them?
These simple but powerful questions are at the heart of corporate-, industry-, and firm-level strategies.
diversification
a strategy for reducing risk by owning a variety of items (stocks or, in the case of a corporation, types of businesses) so that the failure of one stock or one business does not doom the entire portfolio
diversification - the basic idea
The basic idea is simple. If you invest in 10 companies in 10 different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas.
Portfolio strategy
a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines
Portfolio - analogy
According to portfolio strategy, the more businesses in which a corporation competes, the smaller its overall chances of failing. Think of a corporation as a stool and its businesses as the legs of the stool. The more legs or businesses added to the stool, the less likely it is to tip over.
acquisition
the purchase of a company by another company
beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more through ________________
beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more through unrelated diversification
unrelated diversification
creating or acquiring companies in completely unrelated businesses
According to portfolio strategy, when businesses are unrelated, ________ in one business or industry should have a minimal impact on the performance of other companies in the corporate portfolio.
According to portfolio strategy, when businesses are unrelated, losses in one business or industry should have a minimal impact on the performance of other companies in the corporate portfolio.
investing the profits and cash flows from mature, slow-growth businesses into newer, faster growing businesses can reduce ___________.
investing the profits and cash flows from mature, slow-growth businesses into newer, faster growing businesses can reduce long-term risk.
BCG matrix
a portfolio strategy, developed by the Boston Consulting Group, that categorizes a corporation’s businesses by growth rate and relative market share and helps managers decide how to invest corporate funds
star
a company with a large share of a fast-growing market
To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must ____________________.
To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must invest substantially in it.
question mark
a company with a small share of a fast-growing market
If the corporation invests in question mark companies, they may eventually become _____, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in ______
If the corporation invests in question mark companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars
cash cow
a company with a large share of a slow-growing market
dog
a company with a small share of a slow-growing market
As the name suggests, having a small share of a slow-growth market is often not profitable.
Exhibit 5.6,
there is a U-shaped relationship between diversification and risk. The left side of the curve shows that single businesses with no diversification are extremely risky (if the single business fails, the entire business fails). So, in part, the portfolio strategy of diversifying is correct—competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too—the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses.
The BCG matrix often yields incorrect judgments about a company’s potential. This is because it relies on ________________
The BCG matrix often yields incorrect judgments about a company’s potential. This is because it relies on past performance (i.e., previous market share and previous market growth), which is a notoriously poor predictor of future company performance.
So, what kind of portfolio strategy does the best job of helping managers decide which companies to buy or sell?
the best approach is probably _______________
So, what kind of portfolio strategy does the best job of helping managers decide which companies to buy or sell?
the best approach is probably related diversification
related diversification
creating or acquiring companies that share similar products, manufacturing, marketing, technology, or cultures
The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio.
grand strategy
a broad corporate-level strategic plan used to achieve strategic goals and guide the strategic alternatives that managers of individual businesses or subunits may use
Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use in deciding what businesses they should be in.
There are three kinds of grand strategies:
growth, stability, and retrenchment/recovery.
growth strategy
a strategy that concentrates on increasing profits, revenues, market share, or the number of places in which the company does business.
Companies can grow in several ways. For example, they can grow externally, by merging with or acquiring other companies in the same, or different, businesses.
Another way to grow is internally, directly expanding the company’s existing business or creating and growing new businesses.
stability strategy
a strategy that concentrates on improving the way in which the company sells the same products or services to the same customers.
For example, Subaru has been making four-wheel-drive station wagons for 30 years. Over the past decade, it has strengthened this concentration by manufacturing only all-wheel-drive vehicles, such as the Subaru Legacy and Outback; both are popular in snowy and mountainous regions.
Companies often choose a stability strategy when their __________________________ or after they have struggled with periods of explosive growth.
Companies often choose a stability strategy when their external environment doesn’t change much or after they have struggled with periods of explosive growth.
retrenchment strategy
a strategy that focuses on turning around very poor company performance by shrinking the size or scope of the business.
The initial steps in a retrenchment strategy often include making significant cost reductions; laying off employees; closing poorly performing stores, offices, or manufacturing plants; and/or closing or selling entire lines of products or services.
retrenchment - example
BlackBerry had to go through a retrenchment in 2014, after its sales and market share plummeted. Its stock lost more than two-thirds of its value in 2014 after its BlackBerry phones were overtaken by more powerful devices from Apple and from manufacturers running the Android operating software. The Waterloo, Ontario, device maker says it will refocus on its core enterprise market. It will also consider options for turning the company around that could include partnerships with rivals. We will see if the retrenchment strategy succeeds so that the company passes into the recovery stage.
Recovery
the strategic actions taken after retrenchment to return to a growth strategy.
Industry-level strategy
a corporate strategy that addresses the question, “How should we compete in this industry?”
Competitive rivalry
a measure of the intensity of competitive behaviour between companies in an industry.
Is the competition among firms aggressive and cutthroat, or do competitors concentrate more on serving customers than on attacking one another? Industry attractiveness and profitability both decrease when rivalry is cutthroat.
The stronger the forces, the _____ attractive the industry, and the _____ acute the chosen strategy must be.
The stronger the forces, the less attractive the industry, and the more acute the chosen strategy must be.
threat of new entrants
a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry.
If new companies can easily enter the industry, then competition will increase and prices and profits will fall.
threat of substitute products or services
a measure of the ease with which customers can find substitutes for an industry’s products or services.
If customers can easily find substitute products or services, the competition will be ________ and profits will be lower. If there are few or no substitutes, competition will be ________ and profits will be higher.
If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher.
Threats of substitution include:
substitute performance (margarine for butter, corn fructose for cane sugar)
cost of change (switching costs that take into consideration training, familiarity, quantities, storage)
availability (basketball game for football game, buns for bread, orange juice for apple juice, Coke for Pepsi).
Bargaining power of suppliers
a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs.
When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low or to ensure quality is high. Today, there are so many suppliers of inexpensive, standardized parts, computer chips, and video screens that dozens of new companies are beginning to manufacture flat-screen TVs. In other words, the weak bargaining power of suppliers has made it easier for new firms to enter the HDTV business. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then the suppliers will have the bargaining power to dictate price levels.
Bargaining power of suppliers includes:
the number of suppliers (as noted with HDTVs)
size of suppliers (larger firms can sometimes provide better terms, prices and product variety)
uniqueness of service (which means delivery times, delivery volumes, payment schemes, JIT, special preparation)
ability to substitute (which includes technical knowledge, quality, impact on finished product or service)
cost of changing (again, switching costs involved in training, changing systems and processes, warehousing, retooling)
Bargaining power of buyers
a measure of the influence that customers have on a firm.
If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.
Buyer power includes:
the number of customers (generally, with a lower number of buyers, the power balance favours the buyer)
size of order (the larger the order, the larger the bargaining power)
differences (similar to the supplier power, if the product or service is very differentiated—in quality, convenience, or service, for example—then the bargaining power shifts)
price sensitivity (some buyers are very price sensitive—many manufacturers are, for example—and in that case the bargaining power would shift)
ability to substitute (similar to the supplier power, if the buyer can substitute, then the buyer’s bargaining power increases)
cost of changing (the old switching costs; if buyers can switch with no cost, then the buyer has relatively better bargaining power)
According to Michael Porter, there are four positioning strategies:
cost leadership, differentiation, cost focus, and differentiation focus
cost leadership
the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry
Differentiation
the positioning strategy of providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it
Differentiation protects companies from industry forces by reducing the threat of substitute products. t also protects companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers.
focus strategy
the positioning strategy of using cost focus or differentiation focus to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.
You can never have just a “focus” strategy alone: it must be a differentiation focus or a cost focus (focus on whom, or where, is always useful to state; along with differentiate (how) or cost (how)).
Firm-level strategy
a corporate strategy that addresses the question, “How should we compete against a particular firm?”
Direct competition
the rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and react to each other’s strategic actions.
Market commonality
the degree to which two companies have overlapping products, services, or customers in multiple markets.
The more markets in which there is product, service, or customer overlap, the more intense the direct competition will be between the two companies.
Resource similarity
the extent to which a competitor has similar amounts and kinds of resources.
Exhibit 5.9
Exhibit 5.9 shows how market commonality and resource similarity interact to determine when and where companies are in direct competition. The overlapping area in each quadrant (between the triangle and the rectangle, or between the different-coloured rectangles) depicts market commonality (overlapping products and services). The larger the overlap, the greater the market commonality. Shapes depict resource similarity (similar products and services), with rectangles representing one set of competitive resources and triangles representing another.
Firms in direct competition can make two basic strategic moves:
attacks and responses
attack
a competitive move designed to reduce a rival’s market share or profits.
response
a competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit.
There are two kinds of responses
The first is to match or mirror your competitor’s move. For instance, GE sells 70 percent of the freight locomotive rail cars in the North American market, with the remaining 30 percent sold by Caterpillar. To become more competitive with GE, Caterpillar closed a unionized locomotive manufacturing plant in Ontario, replacing it with brand-new nonunionized plants in Muncie, Indiana, and Brazil. Bill Ainsworth, who leads Caterpillar’s railroad business, says the new Muncie plant “will be the most efficient locomotive-manufacturing plant in the world.” In response to Caterpillar’s cost-cutting moves, GE eliminated 950 jobs at its unionized plant in Pennsylvania, shifting production work to a new, nonunionized manufacturing plant in Texas. With GE’s union wages running $25 to $36 an hour compared to the $14.50 an hour at Caterpillar’s nonunionized Muncie plant, GE had to respond by finding a way to lower costs.
When market commonality is strong and companies have overlapping products, services, or customers in multiple markets, there is ______ motivation to attack
When market commonality is strong and companies have overlapping products, services, or customers in multiple markets, there is less motivation to attack and more motivation to respond to an attack.
The reason for this is straightforward: when firms are direct competitors in a large number of markets, they have a great deal at stake.
In general, the more moves (i.e., attacks) a company initiates against direct competitors and the greater a company’s tendency to respond when attacked, the _________ its performance.
In general, the more moves (i.e., attacks) a company initiates against direct competitors and the greater a company’s tendency to respond when attacked, the better its performance.
