Competitive Strategy 2 Flashcards
1
Q
Vertical Integration and Outsourcing: Control
A
- firms want to control investment decisions in supplier resources and capabilities that are STRATEGICALLY IMPORTANT
- therefore, these activities are more likely to be specialized within the firm
2
Q
Types of Control Problems
A
- Suppliers price - can alleviate by dividing and conquering (don’t rely on just one supplier)
- Supplier investment in the asset or activity that produce the input - firm wants to make sure its own value and cost drivers increase as much as possible from its suppliers investment
- Supplier incentives - alignment with buyer strategy
- Supplier handling of sensitive information - firm is exposing itself to risk - can they trust the supplier?
3
Q
The Efficient Boundaries Model
A
- model compares in-house and market costs as supplier specialization to the buyer increases
- examines both transaction and production costs
- assumes market supply is always more attractive when the input is not customized to the buyer (as pieces get more complicated, supplier will charge more)
- assumes in-house production is more attractive when the cost advantage declines due to customization or a lower volume of purchases
4
Q
Patterns of Vertical Integration
A
- Initial Market purchase - low buyer competence/low strategic competence
- Strategic importance rises, the supplier can’t give the firm the control it needs, partnership fails
- The firm vertically integrates as it invests in building capabilities to increase its competence - high buyer competence/high strategic importance
KEY: the firm has a strong incentive to continue investing in the activity since it is strategically important
ALSO: the opposite could be true
5
Q
Patterns of Outsourcing
A
- Initial vertical integration of a strategically important activity - high buyer competence/high strategic competence
- the firm’s competence lowers relative to its competitors - low buyer competence/high strategic importance (firm’s partnership with supplier gives it control over investment decisions)
- The partner may fail to cooperate effectively so the firm invests in new capabilities to increase its competence OR reduces the strategic importance of the activity and buys from a standard market supplier
6
Q
Key Points re: Vertical Integration/Outsourcing
A
- Control needs to dominate vertical integration decisions (e.g. Unilever and horsemeat as well as Nestle- traceability)
- Control and buyer competence affect outsourcing
- Vertical Integration almost always involves a change in the way the activity is executed (not frozen in time)
- Vertical Integration and outsourcing decisions are ALWAYS made for an activity or for an asset with associated activities NOT for a product or input i.e. not for the final product
7
Q
Volume and Technological Uncertainty
A
volume uncertainty = the higher it is, leads to higher levels of vertical integration (ESPECIALLY when competition is weak)
technological uncertainty = the higher it is, leads to lower levels of vertical integration (ESPECIALLY when competition is strong)…changing so often, don’t want to be married to a particular technology…so, pass the risk on to the suppliers
8
Q
The Problem of Consistency
A
- gains from consistency among activities determine in part the firm’s need for control over them
- system-wide benefits from coordination inhibit the outsourcing of a single activity
9
Q
Strategic Boundaries over the Industry Life Cycle
A
- in early stages of industry development, firms are integrated bc demand for inputs is too small to attract entry of suppliers
- as it grows, suppliers enter and produce inputs for many firms
- as demand drops due to the introduction of substitutes, suppliers exit and firms re-integrate production
10
Q
Strategic Sourcing Framework
A
KEY CHART
- derived from the importance of both control needs and relative competence
- high strategic value/high relative competence = make
- low strategic value/low competence = buy
- high strategic value/low competence = process innovation (control as much as possible)
- low strategic value/high competence = make or buy
e.g. Drax’s new technology from biomass was important enough to spend $ to set-up a system to produce themselves
11
Q
Conditions that Foster Partnerships (2)
A
- The activity has high strategic value to the firm
2. The firm has a low competency to perform the activity
12
Q
Trends in Partnership Foundation (7)
A
- Global integration of manufacturing and service industries
- Diffusion of Japanese partnering practices
- Diffusion of partnerships with suppliers (formed in response to competition by Japanese durable goods)
- Rise of outsourcing
- Rise of supply chain management practices
- Growth of technology intensive industries
- Emergence of regional networks
13
Q
Global Integration and Partnering
A
- partnering is the preferred mode of entry into foreign markets
- opportunities for foreign expansion are increasing as the developed world expands
- partnering enables control over up-or-downstream activities
14
Q
Rise of Outsourcing
A
- trend first began in the US and rapidly spread through EU
- need for additional cost reduction in the face of rising competition
- entry of firms designed to induce customers to outsource (e.g. IT, HR, logistics)
- viability of firms offering alliances as type of supply relationship
15
Q
Rise of Supply Chain Management Practices
A
- focus on delivery as a value driver and on cost reduction through improved practices in logistics
- involves establishment of close relationships btw producers and distributors as well as btw producers and suppliers (e.g. often with logistics providers such as UPS)
16
Q
Disadvantages of Partnerships (4)
A
- Reduced control over decision-making
- Strategic Inflexibility (conflicting interests, committing to each other’s resources)
- Weaker organization identity (start-ups may lose control over investment and other types of decisions)
- Anti-trust issues (to mitigate, demonstrate the partnership provides significant benefits)
17
Q
Partner Selection Considerations
A
- overall, need to be good enough to know what you can and can’t do before you can find a partner
1. Current capabilities of the potential partner (contribution to value and cost drivers)
2. Projections of the partner’s future capabilities
3. Comparison and assessment of alternative partners
18
Q
Managing Partnerships
A
- Maintaining a convergence of purpose between partners
- Ensuring a consistency of positioning across the partners
- Managing the interface between the partners
19
Q
Ensuring a Consistency of Positioning Across the Partners
A
- partnerships are managed at various levels in each firm and each level (CEO, tech staff, operating managers, etc.) will have its own perspective
- managing these differences in perspective is critical to achieving partnership goals
20
Q
Framework for Global Competition
A
- The economic logic of global competition depends on the costs and benefits of geographical location (regional advantages and national advantages) - e.g. Heinz is going against food trends in the US so expanding globally
- Global strategy is beyond leveraging benefits of the firm’s country of origin (includes leveraging firm’s capabilities and resources across national markets)
- Successfully competing as a global firm means achieving higher economic performance that indigenous rivals (“how am I doing?” is relative to the locals)
21
Q
Framework for Global Competition
A
- The economic logic of global competition depends on the costs and benefits of geographical location (regional advantages and national advantages)
- Global strategy is beyond leveraging benefits of the firm’s country of origin (includes leveraging firm’s capabilities and resources across national markets)
- Successfully competing as a global firm means achieving higher economic performance that indigenous rivals (“how am I doing?” is relative to the locals)
22
Q
Motivations for Partnerships (5)
A
- Technology transfer and development (common btw start-ups and established companies in the tech industry or coalitions of standard firms for dominance - includes patent sharing, etc.)
- Market access (partnering with local firm to gain access to new geographic market including local regulation) - e.g. CARMAKERS need to form partnerships to compete in the industry
- Cost Reduction (economies of scope, learning curve)
- Risk reduction (esp. in firms with high growth rates and large projects like telecommunications where resources are limited)
- Change in industry structure (alliances separates competitors into clusters that compete with each other, firms not allied must be able to match combined capabilities of cluster)
23
Q
Maintaining a Convergence of Purpose Between Partners
A
- partners are likely to have multiple dimensions and they will differ on their goals on each
- mutual understanding of these goals improves inter-firm coordination over the coarse of a relationship
e. g. McDonalds in India - clash of business culture and expectations
24
Q
Managing the Interface Between the Partners
A
- the interface between partners should be designed to achieve the partnership’s goals
- interface may include: a separate unit to manage the partnership (joint venture), a separate unit in each firm to manage, Ad Hoc relationships between the firms, function by function
e. g. pharma industry - adult discussion vs. hostile takeover
25
Q
Why do Regions Matter?
A
- Labor force pooling among firms
- Use of specialized local suppliers
- Technological spillovers in the region
- overall, a win-win atmosphere
- regional incubators
