Chapter 6 Defining the Organization's Strategic Direction

Question 1

What is the first step in formulating a company’s technological innovation strategy?

Answer 1

The first step in formulating a company’s technological innovation strategy is to assess its current position and define its strategic direction for the future.

Question 2

What does a strategy require when the current position of a firm is assessed?

Answer 2

It then requires articulating an ambitious strategic intent—one that creates a gap between
a company’s existing resources and capabilities and those required to achieve its intent.

Question 3

What are the analyses to be performed to assess the current position of a firm?

Answer 3

To assess the firm’s current position in the marketplace, it is useful to begin with some standard tools of strategic analysis for analyzing the external and internal environment of the firm.

Question 4

What are the 2 most commonly used tools to analyze external analysis?

Answer 4

The two most commonly used tools for analyzing the external environment of the firm include Porter’s five-force model and stakeholder analysis.

Question 5

What does the Porter-s five-force model do?

Answer 5

In this model, the attractiveness of an industry and a firm’s opportunities and threats are identified by analyzing five forces plus the role of complements

Question 6

What are the 5 forces of Porter?

Answer 6

1. degree of existing rivalry
2. threat of potential entrants
3. bargaining power of suppliers
4. bargaining power of buyers
5. threat of substitutes
6. role of complements

Question 7

What is the degree of existing rivalry influenced by?

Answer 7

1. the number and relative size of competitors (the more competitors the more rivalry)
2. Rivalry is also influenced by the degree to which competitors are differentiated from each other. For example, if competitors are highly differentiated, they will experience less direct rivalry because their products are
   likely to appeal to different market segments.
3. Demand conditions also influence degree of rivalry. When demand is increasing, there are more revenues to go around and firms will experience less competitive pressure. On the other hand, when demand is declining, firms have to compete for a shrinking pool of revenues, and competition can become very aggressive.

Question 8

What are oligopolistic industries?

Answer 8

Highly consolidated industries with a few large competitors.

Question 9

What are exit barriers?

Answer 9

Costs or other commitments that make it difficult for firms to abandon an industry (large fixed-asset investments, emotional commitment to the industry, etc.).

Question 10

How can exit barriers intensify the rivalry?

Answer 10

In declining industries, high exit barriers (fixed capital investments, emotional attachment to the industry, etc.) can also intensify rivalry by making firms reluctant to abandon the industry

Question 11

By what is the threat of potential entrants influenced?

Answer 11

The threat of potential entrants is influenced by both the degree to which the industry is likely to attract new entrants (e.g., is it prof-
itable, growing, or otherwise alluring?) and the height of entry barriers.

Entry barriers can include such factors as large start-up costs, brand loyalty, difficulty
in gaining access to suppliers or distributors, government regulation, threat of retaliation by existing competitors, and many others.

While profitability and growth may attract new entrants, entry barriers will deter them.

Question 12

What is the bargaining power of suppliers?

Answer 12

The degree to which the firm relies on one or a few suppliers will influence its ability to negotiate good terms. If there are few suppliers or suppliers are highly differentiated, the firm may have little choice in its buying decision, and thus have little leverage over the supplier to negotiate prices, deliv-
ery schedules, or other terms.

The amount the firm purchases from the supplier is also relevant. If the firm’s purchases constitute the bulk of a supplier’s sales, the supplier will be heavily reliant upon the firm and the supplier will have
little bargaining power.

Question 13

What are switching costs?

Answer 13

Factors that make it difficult or expensive to change suppliers or buyers, such as investments in specialized assets to work with a particular sup-
plier or buyer.

Question 14

What is vertical integration?

Answer 14

Getting into the business of one’s suppliers (backward vertical integration) or one’s buyers (forward vertical integration). For example, a firm that begins producing its own supplies has practiced backward vertical integration, and a firm that buys its distributor has practiced forward vertical
integration.

Question 15

What happens to the bargaining power of suppliers when there are switching costs and the firm backward vertically integrate

Answer 15

If the firm faces switching costs that make it difficult or expensive to change suppliers, this will also increase the supplier’s bargaining power. Finally, if the firm can backward vertically integrate (i.e., produce its own supplies), this will lessen supplier bargaining power, and if the supplier can threaten to forward vertically integrate into the firm’s business, this will increase the supplier’s bargain-
ing power.

Question 16

What are the factors that influence the bargaining power of buyers?

Answer 16

The degree to which the firm is reliant on a few customers will increase the customer’s bargaining power, and vice versa.

If the firm’s product is highly differentiated, buyers will typically experience less bargaining power

If buyers face switching costs, this is likely to lower their bargaining power

if the firm can threaten to forward vertically integrate, it will lower customer bargaining power

Question 17

What are substitutes?

Answer 17

Substitutes are products or services that are not considered competitors, but fulfill a strategically equivalent role for the customer

Question 18

What does happen to the threat of substitution when there are a lot of potential substitutes?

Answer 18

The more potential substitutes there are, and the closer they are in function to the firm’s product or service, the greater the threat of substitution. Furthermore,
the threat of substitutes will also be shaped by the relative price.

Question 19

Which factors of complements will influence the threats?

Answer 19

he availability, quality, and price of complements will influence the threats and opportunities posed by the industry. It is important to consider
(1) how important complements are in the industry,
(2) whether complements are differentially available for the products of various rivals (impacting the attractiveness of their goods), and
(3) who captures the value offered by the complements.

Question 20

What is a stakeholder?

Answer 20

Any entity that has an interest (“stake”) in the organization

Question 21

What is the difference between a strategic stakeholder analysis and a normative stakeholder analysis

Answer 21

A strategic stakeholder analysis emphasizes the stakeholder management issues that are likely to impact the firm’s financial performance, while a normative stakeholder analysis emphasizes the stakeholder management issues the firm ought to attend to due to their ethical or moral implications.

Question 22

What is typically the first step of a stakeholder analysis?

Answer 22

Typically, the first step of a stakeholder analysis is to identify all the parties that will be affected by the behavior of the firm (and thus have a “stake” in the firm). For each party, the firm identifies what that stakeholder’s interests are, what resources they contribute to the organization, what claims they are likely to make on the organization, and which will be most important from the firm’s perspective.

Question 23

Who are the stakeholders mostly?

Answer 23

Stakeholders include (but are not limited to) stockholders, employees, customers, suppliers, lenders, the local community, government, and rivals

Question 24

How does the analysis of internal environment f a firm start?

Answer 24

The analysis of the internal environment of the firm most often begins with identifying the firm’s strengths and weaknesses. Sometimes this task is organized by examining
each of the activities of the value chain

Question 25

What is Michael Porter’s model of a value chain?

Answer 25

In Michael Porter’s model of a value chain, activities are divided into primary activities and support activities.

Primary activities include inbound logistics (all activities required to receive, store, and disseminate inputs), operations (activities involved in the transformation of inputs into outputs), outbound logistics (activities required to collect, store, and distribute outputs), marketing and sales (activities to inform buyers about products and services and to induce their purchase), and service (after-sales activities required to keep the product or service working effectively).
Support activities include procurement (the acquisition of inputs, but not their physical transfer, as that would be covered in inbound logistics), human resource management (activities such as recruiting, hiring, training, and compensating personnel), technology development (activities involved in developing and managing equipment, hardware, software, procedures, and knowledge necessary to transform inputs into outputs), and infrastructure (functions such as accounting, legal counsel, finance, planning, public affairs, government relations, quality assurance, and general
management necessary to ensure smooth functioning of the firm).

Question 26

How can each activity be considered?

Answer 26

Each activity can then be considered from the point of view of how it contributes to the overall value produced by the firm, and what the firm’s strengths and weaknesses
are in that activity.

Question 27

What happens when the key strengths and weaknesses are identifies?

Answer 27

Once the key strengths and weaknesses are identified, the firm can assess which strengths have the potential to be a source of sustainable competitive advantage. This helps the firm gain valuable perspective on which of its activities and resources should
be further leveraged in its articulation of its strategic intent for the future.

Question 28

When is a potential source of sustainable competitive advantage?

Answer 28

To be a potential source of sustainable competitive advantage, resources must be rare, valuable, durable, and inimitable.8 Resources that are rare and valuable may yield a competitive advantage, but that advantage will not be sustainable if the firm is incapable of keeping the resources, or if other firms are capable of imitating them

Question 29

Which resources are not readily imitable?

Answer 29

if valuable resources are tacit (i.e., Resources of an intangible nature (such as knowledge) that cannot be readily
codified), path dependent (i.e., they are dependent on a particular historical sequence of events), socially complex (i.e., they arise through the complex interaction of multiple people), or causally ambiguous (i.e., it is unclear how the resource gives rise to value), they will be
extremely difficult to imitate.

Question 30

How is a first-mover advantage a path-dependent advantage?

Answer 30

A first-mover advantage is a path-­dependent advantage that cannot be copied—once a firm has become the first mover in a category, other firms no longer
have the opportunity to be first

Question 31

What happens when a baseline of internal analysis has been established?

Answer 31

Once the firm has established a baseline internal analysis, it can move on to identifying its core competencies and formulate its strategic intent

Question 32

What are the core competencies of a firm?

Answer 32

A company’s core competencies are strategic differentiators that go beyond just technology. They result from combining and harmonizing multiple primary abilities where the firm excels into key specialized expertise. These competencies often encompass various skills, including market management, infrastructure development, and technological prowess

Question 33

What are core competencies the roots of?

Answer 33

Core competencies are the roots from which core products, business units, and end products emerge. To leverage these competencies, organizations must foster cooperation and resource exchange across strategic business units. Instead of tethering individuals to specific units, they should be seen as corporate assets that can be redeployed.

Question 34

What are the three tests that Prahalad and Hamel suggest to identify core competencies?

Answer 34

Prahalad and Hamel suggest three tests to identify core competencies:
whether they provide a significant competitive advantage,

whether they span multiple businesses,

and whether they are challenging for competitors to imitate due to their complex nature and time investment.

Question 35

What can managers do better when viewing the business as a portfolio of core competencies?

Answer 35

By viewing the business as a portfolio of core competencies, managers are better able to focus on value creation and meaningful new business development, rather than cost cutting or opportunistic expansion.

Question 36

What are the risks of core rigitities?

Answer 36

Sometimes the very things that a firm excels at can enslave it, making the firm rigid and overly committed to inappropriate skills and resources.

Rewards for engaging in core competency activities can discourage employees from pursuing more exploratory activities.

knowledge accumulation tends to be very path dependent. Firms that have well-developed knowledge sets along a particular trajectory may find it very hard to assimilate or utilize knowledge that appears unrelated to that trajectory, potentially limiting the firm’s flexibility

Question 37

What are dynamic capabilities?

Answer 37

A set of abilities that make a firm more agile and responsive to
change.

set of abilities that enable it to quickly reconfigure its organizational structure and routines in response to new opportunities

Question 38

What is the firm’s purpose?

Answer 38

A firm’s purpose is to create value. This entails more than just improving operations or cutting costs; it means leveraging corporate resources to create more performance for customers, more well-being for employees, and more returns for shareholders.

Question 39

What does the strategic intent do?

Answer 39

This is accomplished through developing new businesses and markets, and leveraging corporate resources, all guided by the firm’s strategic intent

Question 40

What is a company’s strategic intent?

Answer 40

A company’s strategic intent is a long-term goal that is ambitious, builds upon and stretches the firm’s existing core competencies, and draws from all levels of
the organization. Typically, a strategic intent looks 10 to 20 years ahead and establishes clear milestones for employees to target

Question 41

Why is the forward-looking orientation crucial?

Answer 41

without it companies can easily become focused on markets they have served in the past. Focusing on the firm’s existing markets results in the development of products and services that meet current market requirements, rather than future market
requirements.

Question 42

What do successful and innovative firms question?

Answer 42

Successful and innovative firms question existing price–­performance assumptions. They lead customers by developing and introducing products that extend well beyond current market requirements and help mold the market’s expec-
tations for the future

Question 43

What happens when the strategic intent is articulated?

Answer 43

Once the strategic intent has been articulated, the company should be able to identify the resources and capabilities required to close the gap between the strategic intent and the current position (see Figure 6.7). This includes identifying any technological gap.

Question 44

What does the strategic intent enable?

Answer 44

Articulating the company’s strategic intent enables the company to focus its development efforts and choose the investments necessary to develop strategic technologies
and incorporate them into the company’s new products