Competitive Strategy Flashcards
Market Capitalism in Terms of Strategy
- Basis for what you do is meeting the needs of the customer and providing value
- individual Firm as the primary institution
- Competition for customers among firms
Successful Strategy
- successful firms achieve a sustainable competitive advantage
- businesses achieve competitive advantage by emphasizing cost (i.e. cheap) or value (i.e. the best) or both
Where can a Firm’s Strategy be found?
- in its investments in resources and capabilities that
a) determine its market position
b) defend this position from competitors
Market Positioning
- attention to the transaction with customers (key concept) is central to strategy and is the firms Economic Contribution between buyer/supplier
- two parts of the transaction
1. value to the customer minus the price (this determines demand for the product = buyer’s surplus)
2. price minus cost to the firm (this defines the firm’s profit)
Defending Market Position
- market position is protected through
1. retaining customers (e.g. high switching costs)
2. preventing imitation through: - property rights (e.g. patents)
- dedicated assets (e.g. specialized supplier)
- sunk costs (e.g. R&D)
- casual ambiguity (i.e. the difficulty of copying a key process)
What Determines Firm Profitability? (3 Factors)
- Macroeconomic Factors (e.g. national and global fiscal policies, taxes) EXAMPLE: EU Energy costs twice as much as the US or taxes on cigarettes
- Industry Factors (e.g. competition, entry barriers, buyer/supplier power, substitutes, technologies)
- **Characteristics of the business
a. Market Position (value offered and cost) determined by resources and capabilities
b. Isolating Mechanisms (customer retention, prevention of imitation)
c. Adaptability to changing market conditions
EXAMPLE: Rio (mining firm) adding value to a commodity by merging with a trader
Origins of Strategy
*adaptability is important
- industrial and evolutionary economics
- case studies of exemplary companies
- business and industry histories
- economic and organizational sociology
- strategic planning tools
- institutional economics
* chart:
vertically - focus of analysis
horizontally - assumption about how managers make decisions
Strategic Planning
- involves more control and innovation and better problem solving
- details the process for developing business strategies and links them to operational programs and investments (i.e. have a strategy but also have a plan to implement it)
- details the logic behind cash flow forecasts and provides a process for mission, goal setting, problem solving and innovation, etc.)
- firms can be successful without a strategic plan
EXAMPLE of bad strategic planning: Stroh’s Brewing - had goals but not a plan
Strategic Execution
- entails continuous development and improvement of resources and capabilities (companies sometimes fail because they get comfortable)
- elements include: task design, incentives & compensation, control & coordination systems, degree of consistency among firm’s activities, culture/HR
- firms CANNOT be successful without effective strategy execution
EXAMPLE of bad execution: Caterpillar in China
EXAMPLE of bad strategic planning: Brazil businessman Eike - was a better salesman than planner
GOOD execution - Mitsui & Co - using capabilities and resources together - segments working together at every stage of value chain
Industry Analysis (Porter’s 5 Forces)
A firm’s profits are impacted by 5 forces:
- Competition - stronger competition drives prices down
- Buyers - strong buyers demand higher value and lower prices
- Suppliers - strong suppliers lower the value delivered and raise prices
- Entry - easy entry into the industry typically drives prices down
- Technological Substitutions - strong substitutions force firms to raise value and lower prices
*compliments are also important - powerful ones may raise the product’s value
Strategy Over Time: Growth & Innovation
- firms must adapt to achieve success or remain successful (i.e. pay attention to what’s going on)
- adaptation involves investment in innovations to improve and defend the firm’s market position
Life Cycle of Typical Industry (4 Stages)
- Growth - entry-rate exceeds exit, focus on value, expansion
- Shakeout -people who don’t succeed drop out due to the emergence of a dominant/sustainable business model (e.g. IBM PC), exit rate exceeds entry
- Maturity - plateau - limited in/out, exit and entry rates are about the same, focus on cost
- Disruption and either Decline or Rejuvenation - technological substitutes offer a stronger buyers surplus which draws them away
Vertical Integration vs. Outsourcing vs. Strategic Alliance
Vertical Integration = company decides to take on more of the process of producing a product
Outsourcing = company takes on less production by shifting to an outside supplier (can only do so much to the point where you’re not learning and become vulnerable e.g. Chinese Price book)
Strategic Alliance = relationship between a firm and one of its suppliers in which the firm has more control than a typical market relationship
*these are all central to a firm’s strategy execution
Global Strategy
- global firms rely on both country-specific (e.g. japan and autos) and firm-specific strengths
- sometimes regions within countries are important (e.g. silicon valley)
EXAMPLE: Sysco - strong advantage in the US - can it compete in markets outside the US?
Strategy in Single-Business Firms
Offense = develop a strong market position
Defense = build isolating mechanisms against powerful buyers and competitors (i.e. protect the position)
Strategy in Multi-Business Firms
- create synergies so companies perform better together than they would apart
- provide resources and capabilities
- contribute management or entrepreneurial skills to the units
- build corporate infrastructure that supports the units
- initiate programs that enhance the units
Corporate Governance
- focus on the board of directors
1. regulatory concerns - policies that limit shareholder influence on the firm and those that set senior management compensation
2. Boards have the following general responsibilities: - compliance
- succession
- self-management
- advice and counsel to top management
- executive and director compensation
Three Questions of Business Strategy
- Where are we today?
- Where do we want to go?
- How are we going to get there?
If you don’t have agreement on this, the rest of the process will be very difficult
Keep asking these and re-visit answers constantly
Strategy of “How are we going to get there?” (5 further questions)
- How are we going to grow the business? Two major options - put in more money or acquire a business
- How are we going to build & retain a loyal customer base? e.g. special offers, etc.
- How will we stay ahead of our rivals? figure out what they are going to do (trade info, research, poaching employees, etc.)
- How are we going to organize & operate out business functions to assure alignment? e.g. protocol, operations, etc.
- How are we to boost performance?
Determinant of Firm Profitability
The key determinant is Structure of the Industry which determines the strength of Competitive Forces (which define the nature and size of the gap between revenues and costs)
Porter’s Five Forces That Shape Industry Competition
- Threat of New Entrants
- Bargaining Power of Suppliers
- Bargaining Power of Buyers (leverage)
- Threat of Substitute Products/Services (e.g. ipods replacing walkmans)
- Rivalry Among Existing Competitors
Industry’s Dominant Economic Factors
- market size & growth
- industry profitability
- number of rivals
- number of buyers
- demand-supply conditions
- extent of diversification
- degree or vertical integration
- potential for economies of scale
- degree of technological innovation
Firms Environment (Competitive Forces)
Firm's Environment... Reduces potential profitability when: - rivalry is intense - low entry barriers - attractive substitutes exist - suppliers and/or buyers have bargaining power
Enhances potential profitability when:
- rivalry is moderate or low
- high entry barriers
- attractive substitutes not available or likely
- suppliers and/or buyers lack leverage
Competitive Threat of New Products (Competitive Forces)
New Product/Services... Threat Stronger when: - low switching cost - favorable value/price proposition - attractive substitutes
Threat Weaker when:
- high switching cost
- unfavorable value/price proposition
- substitutes not available
Threat of New Entry (Competitive Forces)
Entry Threats... Stronger when: - entrant pool is large - margins are attractive - buyer demand growing - few barriers to entry - rivals not prepared to contest new entrants
Weaker when:
- entrant pool is small
- profitability low
- buyer demand stable
- high barriers to entry
- rivals ready to contest new entrants
Strength of Buyer Bargaining Power (Competitive Forces)
Bargaining Power... Stronger When: - low switching cost - buyer is large part of seller's business - market transparency high - buyers capable of organizing
Weaker When:
- high switching cost
- buyer is small part of seller’s business
- buyers uninformed regarding alternative suppliers
Strength of Supplier Bargaining Power (Competitive Forces)
Supplier Power... Stronger when: - high buyer switching costs - demand exceeds supply - threat of forward integration
Weaker when:
- suppliers are not differentiated
- supply exceeds demand
- threat of backward integration
Rivalry Competitive Pressures
Rivalry... Stronger When: - slow market growth - buyer switching cost low - great diversity among rivals - consolidation of rivals - emphasis on price cutting to increase volume
Weaker When:
- fast market growth
- buyer switching cost high
- limited diversity among rivals
- actions of single rival have little impact on others
Five Generic Competitive Strategies
- Broad Low-Cost Provider (cost) - e.g. Walmart
- Focused Low-Cost Provider (cost) e.g. Target
- Broad Differentiated Strategy (value) e.g. Tiffany
- Focused Differentiation Strategy (value) e.g. Mercedes
- Best Cost Provider Strategy (cost & value) e.g. best buy
Strategic Planning Should (9)
- require evaluation of the contribution of investments to financial goals (in the context of industry trends and competitor behavior)
- extend top management leadership and power
- neutralize decision-making basis
- overcome organizational drift (losing focus)
- identify what the org. needs to do to improve performance
- be distinct from strategy execution
- act as a tool for management decision-making
- generate commitment from employees and motivate systems of control
- be reviewed regularly and in response to unexpected and significant market changes
Decision Making Biases (3)
- Myopia - weighting short term over long terms outcomes, controlling for a discount rate (i.e. do you want $20 next week or $100 in two years
- Sunk Costs - continuing to invest in failing projects in hope of getting back the original investment
- Bias based on whether a decision is framed in terms of gains or losses - tending to be risk seeking in terms of losses and risk adverse to gains (prospect theory)
Strategic Planning Elements in a Single Business
- mission statement
- analysis of industry position
- financial & operating goals
- strategic initiatives
- program planning within each initiative
Advantages/Risks of Single Business
Advantages
- overall, easier to understand a clear understanding of purpose, etc.
- easier to allocate resources to respond to market conditions
Risks
- risk losing everything due
- viability of business can be easily threatened
- significant market changes can occur quickly
Industry Analysis
- necessary for a strategic plan
- provides a baseline for goal setting
- identifies how much firm performance is due to macroeconomic/industry factors
- should include a detailed estimate of direct/indirect strategies
- may be improved by scenario planning
Elements of Industry Analysis
- trends (EXAMPLE: carmakers harnessing the expertise of tech the tech world)
- regulatory factors (EXAMPLE: cigarettes - can’t smoke anywhere anymore)
- entry/exit rates
- industry experienced disruption?
- cost drivers
- industry profitability trend
- competitor analysis
Financial Goals
- setting goals to focus management attention and push management team to articulate which investments are strategically important Key questions 1. what is planning period? 2. what are the key financial metrics? 3. what should the goals be?
