Chapter 7 / Week 7: Leadership, Profitability, and Generic Strategies Flashcards
eBook – Read page 52-53 Is the industry outlook conducive to good profitability.
eBook – Read page 52-53 Is the industry outlook conducive to good profitability.
PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry’s outlook for
future profitability.
The important factors on which to base a conclusion include (conclusion as in after you conduct the analyses provided in card 2)
- How the company is being impacted by the state of the macro-environment. • Whether strong competitive forces are squeezing industry profitability to subpar levels.
- Whether the presence of complementors and the possibility of cooperative actions improve the company’s prospects.
- Whether industry profitability will be favorably or unfavorably affected by the pre-vailing driving forces.
- Whether the company occupies a stronger market position than rivals. • Whether this is likely to change in the course of competitive interactions.
- How well the company’s strategy delivers on the industry key success fact
As a general proposition, the anticipated industry environment is fundamentally attractive if it presents a company with:
Good opportunity for above-average profitability;
the industry outlook is fundamentally unattractive if a company’s profit prospects are unappealingly low.
When a company decides an industry is fundamentally attractive and presents
good opportunities,
a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business.
When a strong competitor concludes an industry is becoming less attractive,
it may elect to simply protect its present position, investing cautiously—if at all—and looking for opportunities in other industries.
A competitively weak company in an unattractive industry may see its best option as
finding a buyer, perhaps a rival, to acquire its business
Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63
BEYOND
Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63
BEYOND
The level of industry profitability is neither random nor the result of entirely industry specific- influences:
it is determined by the systematic influences of the industry’s structure
Profits earned by the firms in an industry are determined by three factors:
1) The value of product to customers
2) The intensity of competition
3) The bargaining power of industry members relative to their suppliers and buyers
eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.
BEYOND
eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.
BEYOND
Business-level strategy
The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition:
■Who are the customer segments we will serve?
■What customer needs, wishes, and desires will we satisfy?
■ Why do we want to satisfy them?
■How will we satisfy them?
Competitive advantage is determined jointly by _____ and ______ effects
Industry
Firm
At the firm level, performance is determined by _____ and _________ relative to competitors
Value
Cost positions
Competitive advantage is based on
the difference between the perceived value a firm is able to create for consumers (V), captured by how much consumers are willing to pay for a product or service, and the total cost (C) the firm incurs to create that value.
The greater the economic value created = (V−C),
the greater is a firm’s potential for competitive advantage.
To answer the business-level strategy question of how to compete, managers have two primary competitive levers at their disposal:
value (V) and cost (C)
Strategic trade-offs
Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.
A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile,
either as differentiator or a low-cost leader
blue ocean strategy
is only successful, in contrast, if the firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs.
There are two fundamentally different generic business strategies
1) differentiation
2) cost leadership.
A differentiation strategy (generic strategy)
Generic business strategy that seeks to create higher value for customers by delivering products or services with unique features, than the value that competitors create, while containing costs.
Incorporate features that appeal to buyers and create sustainably distinctive product
Use higher prices to recoup differentiations costs
Can be tangible or intangible
A cost-leadership strategy (generic strategy)
Generic business strategy that seeks to create the same or similar value for customers at a lower cost.
Leads to lower cost for consumers to buy at
These two business strategies are called generic strategies because
they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context.
Because value creation and cost tend to be positively correlated
however, important trade-offs exist between value creation and low cost.
A business strategy, therefore, is more likely to lead to a competitive advantage if it allows a firm to either ______________ or __________ than its rivals that result in creating more value or offering similar products / services at lower costs
perform similar activities differently
perform different activities
Scope of competition
The size—narrow or broad—of the market in which a firm chooses to compete
Focused cost-leader-ship strategy
Same as the cost-leadership strategy except with a narrow focus on a niche market.
Focused differentiation strategy
Same as the differentiation strategy except with a narrow focus on a niche market.
The goal of a differentiation strategy is to
add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price.
Economies of scale
denote decreases in cost per unit as output increases
Economies of scope
Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.
Here, we will study the most salient value drivers that strategic leaders have at their disposal, they are:
1) Product features
2) Customer service
3) Complements
The condition of ∆V > ∆C must be fulfilled if a
Differentiation strategy is to strengthen a firm’s strategic position and thus enhance its competitive advantage.
1) PRODUCT FEATURE
Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price
2) CUSTOMER SERVICE
Exceptional customer service such as not using a script when talking to customers, having free shipping on returns,
3) COMPLEMENTS
Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for strategic leaders in their quest to enhance the value of their offerings.
Example: Smartphones and cellular services (one without the other is useless)
The goal of a cost-leadership strategy is to
reduce the firm’s cost below that of its competitors while offering adequate value.
Cost leader
as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or on lowering the operating cost to deliver a service in order to offer lower prices to its customers.
A cost leader can achieve a competitive advantage as long as
its economic value created
(V − C) is greater than that of its competitors
The most important cost drivers that strategic leaders can manipulate to keep their costs
low are
1) Cost of input factors.
2) Economies of scale.
3) Learning-curve effects.
4) Experience-curve effects
1) COST OF INPUT FACTOR
One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.
2) ECONOMIES OF SCALE
Decreases in cost per unit as output increases.
Think of a bowl and the area that doesn’t go up (the middle) is the economies of scale
What causes per-unit cost to drop as output increases (up to point Q1)? Economies of
scale allow firms to:
1) Spread their fixed costs over a larger output.
2) Employ specialized systems and equipment.
3) Take advantage of certain physical properties
Minimum efficient scale (MES)
Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.
Diseconomies of scale
Increases in cost per unit when output increases.
A differentiation strategy is defined by
establishing a strategic position that creates higher perceived value while controlling costs.
A successful differentiation strategy is likely to be based on
unique or specialized features
of the product, on an effective marketing campaign, or on intangible resources such as a reputation for innovation, quality, and customer service
The threat of entry is reduced:
Competitors will find such intangible advantages time-consuming and costly, and maybe impossible, to imitate.
If the differentiator is able to create a significant difference between perceived
value and current market prices,
the differentiator will not be so threatened by increases in input prices due to powerful suppliers.
Exhibit 6.8 (textbook green 159, ebook 157)
Good diagram comparing porters five forces and differentiation and cost leadership
A cost-leadership strategy is defined by
obtaining the lowest-cost position in the industry while offering acceptable value.
The success of cost leadership, differentiation, and focused variations thereof depends on context and relies on two factors:
How well the strategy leverages the firm’s internal strengths while mitigating its weak-nesses.
How well it helps the firm exploit external opportunities while avoiding external threats
Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.
Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.
To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas
1) Profitability
2) Productivity
3) Competitive position
4) Employee Development
5) Employee Relations
6) Technological leadership
7) Public Responsibility
1) Profitability
Obviously need these, best measured in earnings per share or return on equity
2) Productivity
Commonly used items for this: Number of items produced, number of services rendered per unit of input
Can be based on cost decreases, such as reducing defective items, customer complaints leading to litigation, or overtime
3) Competitive position
Commonly used terms: Total sales or Market share
4) Employee Development
Employee value education and training
5) Employee Relations
Believe that productivity is linked to employee loyalty and to appreciation from managers
6) Technological leadership
Firms must decide whether to lead or follow in the marketplace
Good technology helps the company
7) Public Responsibility
Examples may be charitable donations, educational contributions, minority training, public or political activity, community welfare, or urban revitalization
5 Qualities of long-term objectives
1) Flexible
2) Measurable
3) Motivating
4) Suitable
5) Understandable
1) Flexible
Objectives should be adaptable to unforeseen or extraordinary changes in the firm’s competitive or environmental forecasts
2) Measurable
Objectives must clearly and concretely state what will be achieved and when it will be achieved, thus measurable over time
3) Motivating
Challenges evoke motivation when they are difficult, but not so hard they can not be completed
4) Suitable
Objectives must be suited to the broad aims of the firm, which are expressed in its mission statement
5) Understandable
Must understand what is to be achieved and the major criteria in which their performance will be evaluated
Balance scorecard
Set of four measures directly linked to a company’s strategy: financial performance, customer knowledge, internal business processes, and learning and growth
Generic strategy
A core idea about how a firm can best complete in the marketplace
Shareholder value
Share price
Total return to shareholders
Market capitalization
Negatives: Stock prices are volatile, effects overall macro-economic forces, irrationality of stock price evaluations
These are not always the best measure of industry/firm attractiveness because:
Return on invested capital (ROIC)
Best measure of performance and attractiveness in an industry
Incumbent’s advantage
Deeper insights into needs of customers you serve + understand profitability of serving and retaining them = Knowledge of needs and profits are less susceptible to imitation than features of
Multi-dimensional Approach to Assessing Attractiveness of an Industry
1) Quantitative approach
2) Qualitative approach
1) Quantitative approach
Economic value
Shareholder value
Accounting/financial measures
2) Qualitative approach
Leadership
Range of strategic options to gain Competitive advantage
Complements
Firm’s Cost
= C
Firm’s profit
= P-C
Limitations of Accounting Data
Past performance
-Historical records look backward
Do not consider off-balance sheet items
-Assets owned or leased
Focus on tangible assets
-Difficulty with measuring intangible assets such as patents/trademarks, brand reputation, innovation, customer experience, quality
Differing financial structures/practices of firms make it difficult for direct comparison
Book value vs market value
Growth Ratios
Measure change year over year
- Sales
- Various expense categories
- Income
- Earnings per share
- Dividends per share
- Price-earnings ratio
Indicate trends
-Ability to rationalize trends
General Growth Ratio % =
(Current - past) / Past
Profitability Ratios
See slides 20 + 21 for all the equations from Accounting 201
Leverage Ratios
Indicate the source of the firm’s capital
- Owners
- Creditors
Leverage refers to using capital with a fixed interest charge to “amplify” profits in relation to equity shares
Most common ratio measures the % of total funds provided by debt
Leverage / Solvency Ratios
See slide 23
Liquidity/Activity Ratios
Indicators of a firm’s ability to meet short term obligations including:
- Current liabilities
- Currently maturing long term debt
Normal cash cycle (B2B)
Sales > Accounts Receivables > Cash
Indicate how effectively a firm is using its resources
-Compare revenues earned to the resources used in generating them
Liquidity / Activity ratios
See slide 25
Levels of competitive advantage
From top to Bottom: Distinct competence, Core competences Core Skills Capabilities
Costs can be categorized by:
Direct/Indirect
Variable/Fixed
COGS/Operations
Administration & Overhead
Differentiation Advantages
Command premium prices for the firm’s products
Increased unit sales due to attractive differentiation
Brand loyalty that bonds buyers to the firm’s products
Differentiation Risks
Adding too much so that product exceeds the needs and use patterns of most buyers
Overspending on efforts to differentiate the firm’s product offering
Competitors achieve new, more valued point of differentiation
Uniqueness can be created through:
Product features and product performance
Complementary services
Brand image and intensity of marketing activities Technology embodied in design and manufacture
Quality of purchased inputs
Procedures impacting customer experience
Skill and experience of employees
Location
Effective Low-Cost Approaches:
Pursue cost-savings that are difficult imitate.
Perform value chain activities more cost-effectively than rivals.
Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities.
Work to quickly achieve economies of scale and learning curve advantages
