Megs Flashcards
5 forces model views industry structure as stable and exogenous, but structure actually changes through dynamic/endogenous competition
Grant 2008
Competitive strategy is about being different (choosing a different set of activities to deliver a unique mix of value) - each reinforces the other and supports strategy
Porter 1996
Constant improvement in operational effectiveness is necessary to achieve superior profitability, but not sufficient. Leads to competitive convergence.
Porter 1996
Strategic positioning can be: “variety-based”, “needs-based” or “access-based” - not mutually exclusive - according to…..?
Porter 1996
For each cumulative doubling of experience total costs decline by 20-30% due to economies of scale, organisational leaning and technological innovation
BCG Experience Curve
Maintain a balance between cash cows and stars, while allocating some resources to question marks (potential stars), and sell off dogs
BCG
Deliberate plans are ‘realised as intended’ whereas emergent plans are ‘realised despite, or in the absence of, intentions’ Deliberate and emergent strategies can be seen as two ends of a continuum upon which real-world strategies lie.
Mintzberg and Waters 1985
Comitting to a deliberate plan is focusing on a stable fantasy instead of responding to an evolving reality
Mintzberg and Waters 1985
Finds significant mean reversion in ROIC - WACC for the Russell 3000 non-financial firms from 1999-2009. However, those at the top quartile stayed at the top quartile.
LMCM Analysis
High performance never lasts - performance measures regress towards the mean - consistently high performance firms are statistical anomalies
Fama and French 2000
Survivorship bias Shows study by “Zook and Allen” (n=1854) that most high performance firms focused on one set of core strategies would generate contrary conclusions if just 200 extra failures were included. Can correct for such bias by assuming a normal distribution of successes and failures.
Denrell 2005
Strategically-related firm acquisition can generate abnormal returns to shareholders of bidding firm in imperfectly competitive markets (firms value synergies differently).
Barney 1988
5 Forces example: Faces an industry with a similar product, so differentiates itself using brand awareness/unique shop experience (size names) to fight new entry
Starbucks
Core competencies (which are knowledge-based/involve collective learning) are enhanced as they are applied - this suggests increasing marginal returns to their use
Prahalad and Hamel 1990
Industry structure sets industry profitability in the medium and long-run “Forces” are those that can directly and independently affect competition and profitability - they are necessarily either good or bad
Porter 2008
5 Forces model is useless for new entrants, since it says industries with the highest barriers to entry are the most profitable to be in
Aktouf et al 2005
Criticisms of 5F
Selfish: Competing against buyers and suppliers. Ghoshal (2005) Useless for new entrants, “a good industry is one with high barriers to entry: Aktouf et al. (2005) Black-boxes the firm (Foss 1996). Need to combine with RBV.
Profit from innovation accrue to owners of complementary assets, not the developer of the intellectual property
Teece 1986
Not profiting from innovation examples
Sony created the first ebook reader but had no content. Amazon was the first one to make it work because theyh had the complementary assets. Microsoft made the first touch screen phone in the 90s. Apple made it successful due to design (Hargadon and Douglas) and knowing what the customer wanted.Â
If a resource is to influence competitive advantage, then it must be VRIN Culture can be a source of sustained competitve advantage, since valuable and rare aspects become part of an unspoken, unperceived common sense of the firm
Barney 1991
Acquirers only earn abnormal returns if they transfer their own resources to the target, creating inimitable synergies When they only recieve, it is likely that multiple bidders competed away all the abnormal returns from the successful bidder
Capron and Pistre 2002
Barney says the same in that bidding means that unless synergies are unique, no gains can be had
RBV is not useful since it is tautogical and not empirically testable. It is also not “operationally valid”
Priem and Butler 2001
Choices about areas of strategy influences future core competences - must chooses paths of flows to maintain inimitability and non-substitutability
Dierickx and Cool 1989
Under increasing returns, many outcomes are possible, since insignificant circumstances become magnified by positive feedbacks to tip the outcome
Arthur 1989
Example of Blue Ocean:
Southwest creating a new market
Example of rapid follower
Examples?
Examples of Strategy Path Dependence
BA GM
Incumbents are not always “creatively destroyed” (Schumpeter) by innovation - they can adapt to change by using market abilities/prior relationships
Rothaermel 2001
The firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments (Link to Emergent strategy)Looks at processes (way things are done), positions (current assets), and paths (strategic alternatives). Managers must look for continuous improvement or combinations of these.
Teece et al. 1997
Possibly translates RBV into a descriptive/usefully dynamic model - use “paths” to change the resources (“positions”) and “processes” you have
Dynamic Capabilities
Buyers are confronted everywhere with ‘an excessive sameness’ - this is often due to imitation
Hotelling
Network competition has driven product standardisation - mutual incentive to imitate since consumers value products more if many others are using compatible equipment
Shapiro 1989
Strategic Planning drives better performance/SCA in industries where less firms are already doing it, and where you acquire it at less than its fair value (imperfect factor markets)
Powell 2003
Firms do not necessarily try to quickly imitate anything that seems profitable (technical complexity/market imperfections as well as internal resitance/cognitive differences)
Regner and Jonsson 2009
The third view (vs. 5F and RBV) - you haven’t got to compete for market share - focus on making other competition irrelevant
Blue Ocean Strategy
Reputational Risk to innovation
Virgin Galactic: 2 of first 3 “Virgin Galactic’” test flight pilots died due to failure. Direct reputational risk to Virgin’s core business of flights.
ther examples?
Possible ways to “stick to the knitting” , i.e. diversification may be based on: core competences, synergy” or fitting with managerial dominant logic - according to..?
Goold and Luchs 1993
Firms that diversify into areas that draw related resources leads to higher profitability than unrelated conglomerates. Also, less diverse firms have larger market shares. Related diversification is better than unrelated diversification because of reputational benefits.
Rumelt 1982
In the 15 years to 1991, there was an estimated 15% loss from diversification (measured by Tobin’s q) - according to..? (n=3659) What’s Tobin’s q? Smaller loss when the firms are related
Berger and Ofek 1995
U-shape model for diversification-performance relationship in emerging markets: must reach threshold before diversification becomes profitable - replicates the functions of absent instutitions
Khanna and Palepu 2000
Findings indicate that there is a conglomerate discount, and a diversification premium (which is more significant for related diversification) n=12000
Villalonga 2004
Differentiate between diversification based on scale-free resources (e.g. reputation) and capacity-constrained resources (e.g. number of managers). Latter cause bottenecks.
Levinthal and Wu 2010
Logical Incrementalism: You can’t predict all major precipitative events, so can’t always plan formally. Strategies emerge as a blend - formed incrementally and opportunistically
Quinn 1978
You may engage in M&A to extend into new products/regions more quickly M&A may be used as a substitute for R&D
No source
Looks at how strategies actually emerge by analyzing an Internet firm. Two types of models: Evolutionary Search and Positioning search. Evolutionary: Bounded Rationality + limited plasticity plasticity (limited scope for strategic change) leads to incremental, satisfactory (local but not global maxima) changes. Based on heuristics and trial and error. Positioning: Strategy is concrete, is about actions and not cognition. TIME DEPENDENCY: Younger firms use evolutionary search and evolve to positioning search.
Gavetti and Rivkin 2007
“Æ’” blaimed own hubris in adding too much tech (esp. vertical doors) to the “Æ’ …”; did not consider implications for manufacturing or suppliers –> production shortfalls
Tesla Model X
A firm cannot just choose when and how to innovate. Instead, this will mainly be determined by the size of a firm and the nature of its accumulated technological competences. Firms don’t always have choice in strategy trade-offs (leader vs follower/broad vs specialised) - strategy can be path dependent, and depend on company structure
Pavitt 1990
Information about new products and processes leaks out to rivals within about a year
Mansfield 1985
Reis 2011
Lean Startup; applied to learning and iteration
Name the Five Forces What affects these forces? What is the framework good for?
Substitutes Bargaining power of Buyers Bargaining power of suppliers Threat of new entrants (high costs, comp. adv., retaliation, regulatory). Note high costs easily overcome with capital markets/cash stock. Intensity of rivalry: Collusive vs. competitive outcomes 5F assesses the long-run profitability of an industry and identifies the key external constraints on profitability. Thats it! Don’t get carried away.
Industry life cycle framework
Johnson et al. 2011
Later entrants take more profits from innovation as they have complementary assets, infrastructure, brand name, and are able to adapt the innovation to the customers needs. Uses example of Betamax and VHS, strategic maneuvering and formign alliances allowed VHS to succeed. Rapid followers follow quickly enough to materialize first-mover benefits, while exploiting those that come from being a leader - can create complementary assets
Cusumano et al. 1992
First mover advantages Technological leadership (Learning curve + continued success in R&D) Preemption of assets (First movers can pick their niche) Buyer switching costs Second mover advantages (First mover disadvantages) Free-rider effects on R&D, infrastructure, and education Less uncertainty Taking advantages of shifts in preferences and technology Incumbent inertia Argues second mover advantages can pay off
Lieberman and Montgomery 1988
Competitive advantage stems from: 1. Resource heterogeneity 2. Ex-post limits to competition (imperfect imitability/substitutability) 3. Ex-ante limits to competition (rents offset acquisition costs) 4. Imperfect resource mobility (rents bound to firm
Peteraf 1983
Given incomplete factor markets, critical assets are accumulated, not acquired (like Barney argues)
Sustainability of advantage depends on how easily assets can be subsituted or imitated. Imitability depends on:
- Time compression diseconomies (R&D has compounding advantages: doing it longer is better than faster)
- Asset mass efficiencies: Historical success translates into favorable initial asset stock positions which in turn facilitate further asset accumulation. Pauslon and Co. for example.
- Inter-connectedness: Accumulating a stock may depend not just on the level of that stock, but also on the level of other stocks. E.g. to the extent that new product developments find their origin in customer suggestions, it may be harder to develop technological know-how for firms who do not have an extensive service network.
- Asset erosion: assets decay over time brand awareness erodes because the consumer population is not stationary.
- Causal ambiguity: R&D investment increases the probability of hitting the in the pharmaceutical industry but it does not rule out chance.
Dierickx and Cool 1989
Examples of second mover advantages through reducing uncertainty.
Rocket Internet
Examples of second mover advantages through complementary assets
Tesla in the self-driving car race.
Google started working on them since 2010 (led by Sebastian Thurn), but since Tesla can field a larger fleet, has an order of magnitude as much data as Google alr.
Cost vs Demand Advantages
Cost Advantage: leads to price competitionDemand Advantage: diffrential between WTP and cost. Leads to diffrentiation strategy. HTC vs Apple as an example
Generic Strategies
Porter 1980 Cost, diffrentiation, or focus
Information about new products and processes leaks out to rivals within about a year
Mansfield 1985
Diversification works when there are conomies of scale and scope due to shared activities and competencies. Examples?
P&G: It’s businesses rely on common marketing expertise & salesforce, distribution system, strategic planning unitDisney: producy extensions, synergies in brand
Why diversify?
- Economies of scale and scope 2. Market power 3. Superior internal financial structure 4. Risk reduction
Palich et al. 2000
Problems with studying diversification
Endogeneity: Whether a firm diversifies is not independent of past performance Undersampling of failure: Few studies are entirely comprehensive Causality: Diversification is not always the only cause of increased (or decreased) profitability
Reasons for mergers and acquisitions
There are 10. 1-4 are the same as from diversification 5. Bargain purchase price: Another company has essential, but underused underavlued assets. Buying may be cheaper than making (esp. if intangible) 6. Broader market access: (Amazon acq. of Souq. Alibaba acq. of Lazada) 7. Technology acquisition: (Deepmind,4G license) 8. Filling some gap: sales force, patents, etc. (Acquihires) 9. Financial resilience:Earnings smoothing and Long term growth / profitability strategy 10. Short-term growthÂ
Christensen et al. 2011
Most reasons for acquisition are our typical reasons (see reasons for acquisitions card) A less-familiar reason for making an acquisition is to fundamentally change a company growth trajectory.The acquirer uses the target’s business model as a platform for growth. Because the business models with the most transformative potential are often disruptive, they can be difficult to evaluate, and CEOs often believe that such acquisitions are overpriced. In fact, however, those are the ones that can pay off spectacularly. Google as an example, agressive acquisitions of moonshots.
Andrande et al. 2001
Study of 4256 deals from 1973 to 1998. Acquisition premia is 38%. Why? Hayward and Hambrick (1997): Proxies of CEO hubris are associated with overpayment in 107 deals, with R^2 of 20%
Coase
1937
Costs include contracting issues: complex and difficult to enforce contracts Humans are subject to Bounded Rationality (Simon, 1947) Assumes at least some agents act opportunistically: this threat increases transaction costs. This is why asset specificity becomes an issue.‘As assets become more specific, governance costs escalate.
Williamson 1981
Make or buy
Make if: No partner available Asset specificity is high Low uncertainty about investment needed Buy if: No anti-trust issues Firms can be integrated Value of combined firms is higher than operating independently
Alternatives to make or buy
- Explicit contracts and sanctions (Tesla, Mobileye contract) 2. Joint ventures 3. Equity investment (Corporate venture capital: GV, GE Ventures, Â
Governments/regulators seen as the second greatest effect on company’s economic value after customers
McKinsey Global Survey results 2012
Fisher Bodies proves this case of transaction costs for high specificity assets. Was originally a contractor for GM but eventually acquired by GM Had location specificity and specificity in facilities (was ready to build GM’s cars.
Klein et al. 1978
Emergent strategy unhelpful, it is waste on endless experimentation. Can’t just learn from experience, must implement strategic plan and adapt if required.
Goold 1996
Bounded Rationality: Planned Strategy is unlikely to be rational after all if acting under bounded rationality.
Simon 1947
Honda Effect: where formal strategic planning is retrospectively attributed to actions where no strategy existed
Pascale 1996
Three fallacies Predetermination: complexities of markets = impossible to predict future. Detachment: aggregated data = detail lost/relies on quantitative measures. Formalization: Planning sucks compared to strategic learning where information is internalised and comprehended
Mintzberg 1994
Study claims planning/performance correlation is strong in very unstable environments. (n=656) Argues that both planning and learning are needed, plans must be reworked and improved, even abandoned!
Brews and Hunt 1999
Focusing on operations abandons the concept of a strategy and becomes generic Operations are a stepping stone/requirement to be successful, not a determinant of success. Need operational effectiveness as well as strategy
Hayes and Pisano 1994
Fallacy of pre-determination we can’t predict tech. change, so must remain flexible, forward thinking and cooperative between levels
Mintzberg 1994
Disruptive technologies: strong incumbents rarely stay at the top of their industry during technological changeSuccessful fail since they rely too heavily on existing customers (future tech. considered uncertain)Advocates looking for new markets using smaller and independent organizations
Bower and Christensen 1995
Case study on Polaroid. Organizational inertia (business model didn’t change despite changing technology) and ignoring new developments in capabilities meant Polaroid failed
Tripsas and Gavetti 2000
Importance of design to accepting new innovations. Using the example of Edison. He modelled his systems on existing gas systems, amking them “palatable” and easy to accept.
Hardagon and Douglas 2001
What source is generic strategies?
Porter 1980
Strategic factor markets. Firms compete on acquiring resources. Strategy arises from imperfect pricing, the rest is luck.
Barney 1986
Firms form a Zipf distribution. If firm size is a proxy for performance, then not everyone can be high performing.
Axtell 2001
Technology diffusion depends on geographic and networks (more central = faster diffusion)
Greve 2009
Firms do not necessarily try to quickly imitate anything that seems profitable (technical complexity/market imperfections as well as internal resitance/cognitive differences)
Regner and Jonsson 2009
The more complicated a firm’s strategy, the more difficult it is to imitate.
Rivkin (2000)
Success fosters structural and strategic inertia, failure stimulates experimentation.
Starbuck et al 2008
