MT1 Flashcards
Strategy (business-level)
A set of actions designed to exploit core competencies and gain a competitive advantage.
3 questions to ask about Strategy
1) Where are we now?
2) Where do we want to go?
3) How are we going to get there?
Rents
Economic profits
In competitive markets…
No rents in the LR
Shareholder value perspectives
1) Descriptive perspective
2) Normative perspective
3) Legal perspective
4) Evolutionary perspective
Descriptive perspective
Profits simply are the goal of many private-sector companies
Normative perspective
Shareholder value should be the goal of managers who are appointed by shareholders
Legal perspective
Corporate governance rules in publicly listed companies require managers to maximize shareholder value
Evolutionary perspective
Only firms that maximize profits survive in the LR
Competitive advantage
Creating superior value for customers that competitors cannot replicate.
Performance (via profits or rents)…
depends on the position of the business’s demand and cost curve, which depends on the external environment, its strategy, and its internal characteristics
Owners/Shareholders/Board of Directors
Set company goals
General Managers (CEO)
Define and execute strategy
Functional Managers
Define and execute tactics
Today’s competitive markets are affected by…
1) Globalization
2) The global economy
3) Rapid technological change
4) Increasing importance of knowledge and people
The global economy
One in which goods, services, people, skills, and ideas move freely across geographic borders
Globalization
The increasing economic interdependence among countries and its organizations
Knowledge
Information, intelligence, and expertise. An intangible resource
I/O Model of Above-Average Returns
1) Study the external environment
2) Locate an above-average return industry
3) Identify the strategy
4) Develop or acquire assets and skills to implement strategy
5) Use the firm’s strengths to implement strategy
IKEA Example (US)
1) Competitive advantage: Low cost, product selection, experience, user-friendly building
2) Core competency: Operational efficency
3) Strategy (Business model): Manufacture and distribute low cost DIY furniture for the mainstream family
- Outsourcing labour to the buyer, since labour cost is high in developed countries
4) Tactics: Focus on DIY, sell at lower price since cost is coming from consumer’s time
IKEA Example (Japan)
- Entered the market in 1974 during Japanese boom, through a JV
- Exited in 1986
- Consumer market does not like wasting time on DIY projects, since TIME IS MONEY
- DIY favour larger, open spaces. Japan has small, cramped spaces
- Japan’s labour cost was low at the time
Core competencies (How can your capabilities add value to the business?)
Capabilities that serve as a source of competitive advantage over rivals
Capability (What can you do with what you own?)
The capacity for a set of resources to perform a task
Resources (What do you own?)
Input into a firm’s production process. The firm’s assets. Includes capital equipment, employees, patents, etc.
Vision
A enduring picture of what the firm wants to achieve
Mission
Specifies the industry in which the firm intends to compete in (5-10 years), changes according to new environmental conditions
Goals
Gives you milestones. Communicates:
- Objective
- Issues
- Impact
- Solution
Disproportionate your efforts
80% of efforts into your strengths, 20% in improving weaknesses
How to build a competitive advantage?
Need core competencies, including:
1) Product Excellence
2) Service Excellence
3) Locational Excellence
4) Operational Excellence
Product Excellence
Superior quality eg. Apple
Service Excellence
Superior quality eg. Mercedes
Locational Excellence
Market by location (like high foot traffic, high visibility) eg. McDonalds
Operational Excellence
Quality at an affordable price. Efficiency in production and ability to maintain quality standards eg. Walmart
TIM HORTONS Example
Offer operational excellence via combo’d products. Product excellence isn’t there, as quality of coffee is inferior to competitors.
Competitive Strategy Decision is formed by (which models?)…
1) Industry Organization (I/O) model
2) Resource-based model
Resource-based model of Above-Average Returns
Resources –> Capabilities –> Core competencies –> Competitive advantage –> Locate attractive industry –> Form strategy
External environment
Contains industry environment (Porter’s 5 forces) and competitor environment
External environment segments
1) Demographic –> Age, pop. size
2) Economic –> Deficits, interest rates, inflation rates
3) Political/Legal –> Tax laws, antitrust laws, privacy laws
4) Sociocultural –> Social trends
5) Technological –> Product innovation
6) Global –> Political events, global markets
7) Sustainable physical environment –> Energy consumption, renewable energy
PEST (The macro-environment)
Contains political, economic, social, and technological changes
Porter’s 5 forces
1) Threat of new entrants
2) Buyer power
3) Supplier power
4) Threat of substitute products
5) Rivalry among competing firms
Threat of new entrants
Likelihood that firms will enter the market. Factored by two things:
1) Barriers to entry (EoS, Differential advantages, switching costs)
2) Expected retaliation
Bargaining power of suppliers
Increasing prices, reducing supply, and even reducing quality are means.
- More power when dominated by a couple firms
Bargaining power of buyers
Exerting the lowest acceptable rate of return for the companies’ invested capital
- More power when large portion of total output its purchased from buyers, low switching costs
Threat of substitute products
Goods/services from outside a given industry that perform similar or the same functions as a product that the industry produces
Intensity of rivalry among competitors
When the firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market position
APPLE (lifestyle and tech) example
- Threat of entry: Low. iOS is their IP
- Rival intensity: Low, only Android competes
- Threat of substitute: Low, only Android competes
- Supplier power: Full control, they make their own software in-house
- Buyer power: No control
THIS MAKES APPLE PROFITABLE
SEMI CONDUCTOR INDUSTRY example
- Threat of entry: High, easy to enter a mature market
- Buyer power: High, there’s many options… cuts into margins
- Supplier power: Ultra high
- Only 5 semiconductor manufacturers, 3 semiconductor designers, 1 software
- Threat of substitutes: Low
- Rivalry intensity: High, since buyer & supplier power is high. Firms entering market have mature tech
Competitor intelligence
The ethical gathering of needed information and data that provides understanding of competitor’s:
- objectives
- strategies
- assumptions
- capabilities
SAMSUNG (manufacturing) example
- Threat of entry: High, Lots of smartphones have Android
- Rival intensity: High
- Threat of substitute: High
- Supplier power: Little control, software is outsourced to Google
- Buyer power: Full control
THIS MAKES SAMSUNG BARELY PROFITABLE
KITKAT case
- Cutthroat competition, top 3 market leaders own 40% market share
- Copycat products
- KITKAT was focused on PRODUCT EXCELLENCE and a COST-LEADERSHIP APPROACH to compete in a mature and saturate market
- Differentiation via branding and marketing
- Promoted UK heritage, promoted “high-end brand”, then targeted mothers via symbolic approach (good luck charm)
- Smaller packaging for Japanese convenience stores
SAMSUNG case
- Problem: No differentiated OS, diminishing consumer base, low product price, cannot up-sell
- Competitive advantage: Vast product portfolio, screens, market share
- How to overcome OS problem? Acquire company with tech in development, form partnership w/ company
Sustainable competitive advantage
When competitors are unable to duplicate the benefits of a firm’s strategy or when they lack the resources to attempt imitation
Factors of sustainable competitive advantages
1) Valuable capabilities
2) Rare capabilities
3) Costly to imitate capabilities
4) Nonsustainable capabilities
Valuable capabilities
Help a firm neutralize threats or exploit opportunities
Rare capabilities
Are not possessed by many others
Costly-to-imitate capabilities
Historical: A unique and a valuable organizational culture or brand name
Ambiguous cause: The causes and uses of a competence are unclear
Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Nonsubstitutable capabilities
No strategic equivalent
What’s needed in a sustainable competitive advantage?
Unique resources, capabilities, and competencies
Types of resources
Tangible and intangible
Tangible resources
Financial, physical, technological, organizational
Intangible resources
Human, innovation, reputation
Value Chain Analysis
Allows a firm to understand the parts of its operations that create value and those that do not
Outsourcing
The purchase of a value-creating activity from an external supplier
- By performing fewer capabilities, a firm can concentrate on the areas which create value
Advantages of outsourcing
1) Improves business focus
2) Provides access to world-class capabilities
3) Accelerates re-engineering benefits
4) Shares risks
5) Frees resources for other purposes
SONY CA example
Producing audio & video related devices to end-consumer
HONDA CA example
Developing performance based engines
AMAZON CA example
User data and IT infrastructure
SHANDA GAMES CA example
Local knowledge
TOYOTA Org. Culture example
Kaizen: Continous improvement… 1% improvement per week = 50+% improvement per year
To position itself, the firm must decide if they intend to…
Perform activities differently OR perform different activities
When selecting a business-level strategy, the firm determines…
1) Who are the consumers?
2) What are the needs of the consumer?
3) How will we satisfy those needs?
Types of business-level strategies
1) Cost-leadership
2) Differentiation
3) Focused cost leadership
4) Focused differentiation
5) Integrated cost leadership/differentiation
Cost leadership
Producing products with features that are acceptable to customers at the lowest cost, relative to competitors (MINIMAL VIABLE PRODUCT)
- Outsource manufacturing
- Above average returns despite presence of competition
Differentiation
Producing products that customers perceive as being different in ways that are important to them
- Product innovation is key
Focused cost leadership/differentiation
Producing products that serve the needs of a niche market
- Include a particular buyer group, a different segment product line, a different geographic market
Integrated cost leadership/differentiation
Firms engage in primary value-chain activities and support functions to achieve low-cost position with some product differentiation
- Efficient production is source of low costs
- Differentiation is source of unique value
Two types of target market
Broad and narrow
Cost leadership and differentiation target the…
Broad market segment
Focused cost leadership and differentiation target the…
Narrow market segment
CHIPOTLE case
- Problem: Drop if profits due to health reasons in store
- Differentiated strategy as it offers customization and flexibility to the consumer, Subway style, while also providing sustainability and local sourcing supplier-side
HAIER example
- Problem: US washer market was saturated, Haier was a foreign entrant and its hard to get individuals to throw out old appliances just to buy a cheaper product
- Business-level strategy: Cost-leader
- Downside of strategy: Great for grabbing market share, but to receive profitability and increase in market share, firms must differentiate
- Solution: Sold mini-washers and mini-appliances for one-person use (focused cost leadership strategy)
- Solution: Bought GE to compete in rural China. Introduced a dual-usage washing machine for washing agricultural products and clothes. DIFFERENTIATION!
