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Strategic Management Application to Business

Plan Development:
A good strategy is a strategy that actually generates such advantages.
Is based on a set of assumptions and hypothesis about the way
competition in this industry is likely to evolve and how that evolution
can be exploited to earn a profit.
- the greater the extent to which these assumptions and
hypothesis accurately reflect how competition in this industry
actually evolves, the more likely it is that a firm will gain
competitive advantage from implementing its strategies.
The Strategic Management Process
Is a sequential set of analyses and choices that can increase the
likelihood that a firm will choose a good strategy; that is, a strategy
that generates competitive advantages.

Mission & Objectives


Mission is a firms long term purpose. Missions define both what a firm
aspires to be in the long run and what it wants to avoid in the
meantime. Missions are often written down in the form of mission
statements.
Whereas a firms mission is a broad statement of its purpose and
values, its objectives are specific measurable targets a firm can use to
evaluate the extent to which it is realizing its mission. High-quality
objectives are tightly connected to elements of a firms mission and
are relatively easy to measure and track over time.
Internal & External Analysis
External analysis a firm identifies the critical threats and
opportunities in its competitive environment. It also examines how
competition in this environment is likely to evolve and what
implications that evolution has for the threats and opportunities a firm
is facing.
Internal analysis helps a firm identify its organizational strengths and
weaknesses. It also helps a firm understand which of its resources and
capabilities are likely to be sources of competitive advantage and
which are less likely to be sources of such advantages.
Strategic Choice

A firm is ready to choose its theory of how to gain competitive


advantage. The strategic choices available to firms fall into two large
categories: business-level strategies and corporate-level strategies.
Business-level strategies are actions firms take to gain competitive
advantages in a single market or industry. While, corporate-level
strategies are actions firms take ot gain competitive advantages by
operating in multiple markets or industries simultaneously.
Based on the strategic management process, the objective when
making a strategic choice is to choose a strategy that
1. supports the firms mission
2. is consistent with a firms objectives
3. exploits opportunities in a firms environment with a firms
strengths
4. neutralizes threats in a firms environment while avoiding a
firms weaknesses.
Strategic Implementation
Occurs when a firm adopts organizational policies and practices that
are consistent with its strategy. Three specific organizational policies
and practices are particularly important in implementing a strategy: a
firms formal organizational structure, its formal and informal
management control systems, and its employee compensation
policies.
What is Competitive Advantage?
A firm has a competitive advantage when it is able to create more
economic value than rival firms. Economic value is simply the
difference between the perceived benefits gained by a customer that
purchases a firms products or services and the full economic cost of
these products or services. Thus, size of a firms competitive
advantage is the difference between the economic value a firm is able
to create and the economic value its rivals are able to create.
A firms competitive advantage can be temporary or sustained.
Temporary competitive advantage is a competitive advantage that
lasts for a very short period of time. A sustained competitive
advantage, in contrast, can last much longer. Firms that create the
same economic value as their rivals experience competitive parity.
Measuring Competitive Advantage
The benefits of a firms product or services are always a matter of
customer perception, and perceptions are not easy to measure. Also,
the total costs associated with producing a particular product or
service may not always be easy to identify or associate with a

particular product or service. Despite the very real challenges


associated with measuring a firms competitive advantage, two
approaches have emerged. The first estimates a firms competitive
advantage by examining its accounting performance; the second
examines the firms economic performance.
Emergent vs. Intended Strategies
Emergent are theories of how to gain competitive advantage in an
industry that emerge over time or that have been radically reshaped
once they are initially implemented.
In reality, it will often be the case that at the time a firm chooses its
strategies, some of the information needed to complete the strategic
management process may simply not be available. In such a situation,
a firms ability to change its strategies quickly to respond to emergent
trends in an industry may be as important a source of competitive
advantage as the ability to complete the strategic management
process.

Evaluating a Firms External Environment


Any analysis of the threats and opportunities facing a firm must begin
with an understanding of the general environment within which a firm
operates. This general environment consists of broad trends in the
context within which a firm operates that can have an impact on a
firms strategic choices. The general environment consists of six
interrelated elements:
1. technological change
2. demographic trends
3. cultural trends
4. economic climate
5. legal and political condition
6. specific international events
Technological changes create both opportunities, as firms begin to
explore how to use technology to create new products and services,
and threats, as technological changes forces firms to rethink their
technological strategies.
Demographics is the distribution of individuals in a society in terms of
age, sex, martial status, income, ethnicity, and other personal
attributes that may determine buying patterns. Understanding this
information can help a firm determine whether its products or services

will appeal to customers and how many potential customers for these
products or services it might have.
Cultural trends is the third element, where the values, beliefs, and
norms that guide behaviour in a society. These values, beliefs, and
norms define what is right and wrong in a society, what is acceptable
and unacceptable, what is fashionable and unfashionable.
The economic climate is the overall health of the economic systems
within which a firm operates. The health of the economy varies over
time in a distinct pattern: patterns of relative prosperity, when demand
for goods and services is high and unemployment is low, are followed
by periods of relatively low prosperity, when demand for goods and
services are low and unemployment is high.
The legal and political dimensions of an organizations general
environment are the laws and the legal systems impact on business,
together with the general nature of the relationship between
government and business.
Specific international events include events such as civil wars, political
coups, terrorism, wars between countries, famines, and country or
regional economic recessions.
A Model of Environmental Threats

to a firm seeking competitive advantage, an environmental threats is


any individual, group, or organization outside a firm that seeks to
reduce the level of that firms performance. Threats increase a firms
costs, decrease a firms revenues, or in other ways reduce a firms
performance.
1. Threat from New Competition
New competitors are firms that have either recently started operating
in an industry or that threaten to begin operations in an industry soon.
New competitors are motivated to enter into an industry by the
superior profits that some incumbent firms in that industry may be
earning. Firms seeking these high profits enter the industry, thereby
increasing the level of industry competition and reducing the
performance of incumbent firms. With the absence of any barriers,
entry will continue as long as any firms in the industry are earning
competitive advantages, and entry will cease when all incumbent firms
are earning competitive parity.
The extent to which new competitors act as a threat to an incumbent
firms performance depends on the cost of entry. If the cost of entry
into an industry is greater than the potential profits a new competitor
could obtain by entering, then entry will not be forthcoming, and new
competitors are not a threat to incumbent firms. However, of the cost

of entry is lower than the return from entry, entry will occur until the
profits derived from entry are less than the cost of entry.

Possible barriers of Entry into an Industry:


1. Economies of scale exists in an industry when a firms costs fall
as a function of its volume of production. For economies of scale
to act as a barrier to entry, the relationship between the volume
of production and firm costs must have the shape of the line in
figure below.

if the cost of engaging in these barrier-busting activities is


greater than the return from entry, entry will not occur, even if
incumbent firms are earning positive profits.
2. Product differentiation incumbent firms possess brand
identification and customer loyalty that potential new
competitors do not. Brand identification and customer loyalty

serve as entry barriers because new competitors not only have


to absorb that standard costs associated with starting production
in a new industry; they also have to absorb the costs associated
with overcoming incumbent firms differentiation advantages. If
the cost of overcoming these advantages is greater than the
potential return form entering an industry, entry will not occur
even if incumbent firms are earning positive profits.
3. Cost advantages independent of scale incumbent firms may
have a whole range of cost advantages, independent of
economies of scale, compared to new competitors. These cost
advantages can act to deter entry because new competitors will
find themselves at a cost disadvantage vis--vis incumbent firm
with these cost advantages. In some settings, incumbent firms
enjoying cost advantages, independent of scale, can earn
superior profits and still not be threatened by new entry because
the cost of overcoming those advantages can be prohibitive.
Examples of these cost advantage, independent of scale, are
include:
o Proprietary technology when incumbent firms have secret
or patented technology that reduces their costs below the
costs of potential entrants, potential new competitors must
develop substitute technologies to compete. The cost of
developing this technology can act as a barrier to entry.
o Managerial know-how when incumbent firms have takenfor-granted knowledge, skills, and information that take
years to develop and that is not possessed by potential
new competitors. The cost of developing this know-how
can act as a barrier to entry.
o Favourable access to raw materials when incumbent
firms have low-cost access to critical raw materials not
enjoyed by potential new competitors. The cost of gaining
similar access can act as a barrier to entry.
o Learning-curve cost advantages when the cumulative
volume of production of incumbent firms gives them cost
advantages not enjoyed by potential new competitors.
These cost disadvantages of potential entrants can act as a
barrier to entry.
4. Government regulation of entry governments, for their own
reasons, may decide to increase the cost of entry into an
industry. This occurs most frequently when a firm operates as a
government regulated monopoly. The government has concluded
that it is in a better position to ensire that specific products or
services are made available to the population at reasonable
prices than competitive markets force.
2. Threat form Existing Competitors

Direct competition threatens firms by reducing their economic profits.


High levels of direct competition are indicated by such actions as
frequent price cutting by firms in an industry (price discounts in the
airline industry), frequent introduction of new products by new
products by firms in an industry (continuous product introductions in
consumer electronics), intense advertising campaigns (pepsi vs coke),
and rapid competitive actions and reactions in an industry (competing
airlines quickly matching the discounts of other airlines).
Attributes of an Industry that Increase the Threat of Direct Competiton:
- Large number of competing firms that are roughly the same size
- Slow industry growth
- Lack of product differentiation
- Capacity added in large increments
3.
Threat of Substitute Products
The products or services provided by a firms direct competitors meet
approximately the same customer needs in the same ways as the
products or services provided by the firm itself. Substitutes meet
approximately the same customer needs, but do so in difficult ways.
Substitutes place a ceiling on the prices firms in the industry can
charge and on the profits firms in an industry can earn. In the extreme,
substitutes can ultimately replace an industrys product and services.
4.
Threat of Supplier Leverage
Suppliers make a wide variety of raw materials, labour, and other
critical assets available to firms. Suppliers can threaten the
performance of firms in an industry by increasing the price of their
suppliers or by reducing the quality of those suppliers.
Some attributes that can lead to high levels of threat are listed:
- Suppliers industry is dominated by small number of firms
- Suppliers well unique or highly differentiated products
- Suppliers are not threatened by subsititutes
- Suppliers threaten forward vertical integration
- Firms are not important customers for suppliers
5.
Threat from Buyers Influence
Buyers purchase a firms products or services. Whereas powerful
suppliers act to increase a firms costs, powerful buyers act to
decrease a firms revenues.
Indicators of the threat of buyers influence in an industry:
- Number if buyers is small
- Products sold to buyers are undifferentiated and standard
- Products sold to buyers are a significant percentage of a buyers
final costs
- Buyers are not earning significant economic profits
- Buyers threaten backward vertical integration

Industry structure and environment Opportunities

Industry structure
Fragmented industry
Emerging industry
Mature industry
Declining industry

Opportunities
Consolidation
First-mover advantage
Product refinement
Investment in service quality
Process innovation
Leadership
Niche
Harvest
Divestment

Opportunities in Fragmented Industries: Consolidation


Fragmented industries are industries in which a large number of small
or medium-sized firms operate and no small set of firms has dominant
market share or creates dominant technologies. Most service
industries, including retail fabrics, and commercial printing are
fragmented industries.
Industries can be fragmented for a variety of reasons:
- May have few barriers of entry = more small businesses to enter,
- Few economies of scale = encouraging small firms to stay small,
- Necessary close local control over enterprises to ensure quality
The opportunity facing firms in fragmented industries is the
implementation of consolidation strategies to become industry leaders.
This can occur in several different ways:
- Discovering new economies of scale,
- Adopt new ownership structures.

The benefits of implementing a consolidation strategy in a fragmented


industry turn in the advantages larger firms in such industries gain
from their larger market share.
Opportunities in Emerging Industries: First Movers Advantage
Emerging industries are newly created or newly re-created industries
formed by technological innovations, changes in demand, the
emergence of new customer needs, etc.
The opportunities that face firms fall into the general category of first
mover advantages. First mover advantages are advantages that come
to firms that make important strategic and technological decisions
early in the development of an industry. First mover advantages can
arise from 3 primary sources:
1. Technological leadership, (through early investment in particular
technologies. Two advantages: 1. Implementation may lead to a
low-cost position based on their greater cumulative volume of
production with a particular technology, 2. May obtain patent
protections that enhance their performance. One group of
researchers found that imitators can duplicate first movers
patent-based advantages for about 65% of the first movers
costs. )
2. Pre-emption of strategically valuable assets, (first movers that
move to tie up strategically valuable resources in an industry
before their full value is widely understood can gain sustained
competitive advantage. Firms that are able to acquire these
resources have, in effect, erected formidable barriers to imitation
in an industry. May include things like: raw materials, favourable
geographic locations, and product market positions. )
3. The creation of customer switching costs. (Customer switching
costs exist when customers make investments in order to use a
firms particular products or services. Can be found in industries
like: personal computers, prescription pharmaceuticals, and
groceries. )
First-moving firms attempt to influence the evolution of an emerging
industry, they use flexibility to resolve this uncertainity by delaying
decisions until the economically correct path is clear and them moving
quickly to take advantage of that path.
Opportunites in mature industries: product refinement,
service, and process innovation
Over time, as these new ways of doing business become widely
understood, as technologies diffues through competitors, and as the
rate of innovation in new products and technologies drops, an industry
begins to enter the mature pahse of its development.
Common characteristics of mature industries include:
- Slowly growth in total industry demand,

- Development of experienced repeat customers,


- Slowdown in creases in production capacity,
- Slowdown in the introduction of new products/services,
- Increase in the amount of international competition, and
- Overall reduction in the profitability of firms in the industry.
Focus shifts from the development of new technologies and products to
refining a firms current products, an emphasis on increasing the
quality of service, and a focus on reducing manufacturing costs and
increased quality through process innovations,
Refining current products: industries like home detergents, motor oil,
and kitchen appliances. Innovations in these industries focus on
extending and improving current products and technologies.
Emphasis on service: with limited abilities to invest, efforts ro
differentiate products often turn towards the quality of customer
service. A firm that is able to develop a reputation for high-quality
customer service may be able to obtain superior performance even
though its products are not highly differentiated.
Process innovation: a firms processes are the activities it engages in to
design, produce, and sell its products/services. It is a firms effort to
refine and improve its current processes. Process innovations designed
to reduce manufacturing costs, increase product quality, and
streamline management become more important.

Evaluating a firms internal capabilities


This will be done through the model of resource-based view (RBV).
Resources is defined as the intangible and tangible assets that a firm
controls that it can use to conceive and implement its strategies.
Capabilities are a subset of a firms resources and are defined as the
tangible and intangible assets that enable a firm to take full advantage
of the other resources it controls. (marketing skills, teamwork, and
cooperation among its managers)
A companys resources and capabilities can be classified into four
broad categories:
1. Financial resources (retained earnings, profit, cash from
entrepreneurs, equity holders, bondholders, and banks),
2. Physical resources (plant equipment, location, access to raw
materials etc),
3. Individual resources (HR training, experience, judgement,
intelligence, insight of individual managers and workers), and
4. Organizations resources (formal reporting structure, formal and
informal planning, controlling, and coordinating systems, culture
and reputation).

VRIO Framework: stands for four questions: value, rarity, limitability,


and organization.
Resource or capability in question
Valuable?
Rare?
Costly to Exploited by Competitive
imitate?
organization? implications /
strengths or
weaknesses
No
No
Disadvantage =
weakness
Yes
No
Parity = strength
Yes
Yes
No
Temporary
advantage =
Strength &
distinctive
competence
Yes
Yes
Yes
Yes
Sustained
advantage =
strength &
sustainable
distinctive
competence
Value: does a resource enable a firm to exploit an environmental
opportunity and/ or neutralize an environmental threat?
If yes, then its resources/capabilities are valuable and can be
considered strength. If no, then its a weakness. Or rather they are only
valuable to the extent that they enable a firm to enhance its
competitive position.

Rarity: is a resource currently controlled by only a small number of


competing firms?
If numerous completing firms control a particular resource or
capability, then that resource is unlikely to be a source of competitive
advantage for any one of them. Instead, valuable but common (not
rare) resources and capabilities are sources of competitive parity. Only

when numerous other firms do not control a resource is it likely to be


source of competitive advantage.
As long as the number of firms that possess a particular valuable
resource or capability is less than the number of firms needed to
generate perfect competition dynamics in an industry, that resource or
capability can be considered rare and a potential source of competitive
advantage.
Imitability: do firms without a resource face a cost disadvantage in
obtaining or developing it?
Valuable and rare organizational resources can be sources of sustained
competitive advantage only if firms that do not possess them face a
cost disadvantage in obtaining or developing them, compared to firms
that already possess them. These kinds of resources are imperfectly
imitable.
2 forms of imitation:
- Direct duplication,
- Substitution.
Reasons as to why it may be costly to imitate another firms
resource/capability:
- Unique historical conditions (first mover advantage and path
dependence because of its low-cost access to resource due its
place in time and space),
- Casual ambiguity (cannot tell what enables a firm to gain an
advantage & based on complex sets of interrelated capabilites),
- Social complexity (interpersonal relationships, trust, culture, and
other social resources that are costly to imitate in the short
term), and
- Patents.
Organization: are a firms other policies and procedures organized to
support the exploitation of its valuable, rare, and costly-to-imitate
resource?
This can range from any unique business/corporate structure (aka
formal reporting structure), management control systems (formal and
informal), compensation policies, etc.

Product Differentiation:
Product differentiation is a business strategy where firms attempt to
gain a competitive advantage by increasing the perceived value of
their products/services relative to the perceived value to other firms
product and services.
Although firms often alter the objective properties of their
products/services in order to implement a product differentiation
strategy, the existence of product differentiation, in the end, is always

a matter of customer perception. Products sold by two different firms


may be very similar, but if customers believe the first is more valuable
than the second, then the first product has a differentiation advantage.
To differentiate its products, a firm can focus directly on the attributes
of:
its products/services:
- Product features,
- Product complexity,
- Timing of product introduction,
- Location.
Or on relationships between itself and its customers:
- Product customization,
- Consumer marketing,
- Product reputation.
Or on linkages within or between firms:
- Linkages among functions within a firm,
- Linkages with other firms,
- Product mix,
- Distribution channels,
- Service and support.