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Strategic Management and Renewal – Review

Session 1 – What is strategy and competitive advantage

1. Essential elements of strategy (5) + e.g. Ikea

e.g. Ikea
Arenas:
- relatively inexpensive, contemporary Scandinavian-style furniture and home furnishings
- target market: young, white-collar customers
- geographic scope: world-wide, where possible
- retailer + control of product design
- NO manufacturing, but working with suppliers
Vehicles:
- organic growth (wholly owned stores), NO acquisitions, very few joint ventures
Differentiation:
- good quality, low prices
- entertaining experience
- extensive product inventory
Staging:
- international expansion, one region at a time
Economic logic:
- scale economies and efficiencies of replication
- standardized products
- long-term suppliers
- enough scale to achieve substantial distribution and promotional efficiency

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2. RyanAir Strategy

***Concepts:

Strategic competitiveness = is achieved when a firm successfully formulates and implements a


value-creating strategy
Strategy = integrated and coordinated set of commitments and actions designed to exploit core
competencies and gain a competitive advantage
Competitive advantage (of a firm) = implementing a strategy that competitors are unable to
duplicate or find too costly to try to imitate
Above-average returns = returns in excess of what an investor expects to earn from other
investments with a similar amount of risk
Risk = an investor’s uncertainty about the economic gains or losses that will result from a
particular investment
Average returns = returns equal to those an investor expects to earn from other investments with
a similar amount of risk
Strategic management process = the full set of commitments, decisions and actions required for
a firm to achieve strategic competitiveness and earn above-average returns
Global economy = one in which goods, services, people, skills and ideas move freely across
geographic borders
Globalization = the increasing economic interdependence among countries and their
organizations as reflected in the flow of goods and services, financial capital and knowledge across
country borders
Technology diffusion = the rate at which new technologies become available and are used

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Perpetual innovation = describes how rapidly and consistently new information-intensive
technologies replace older ones
Disruptive technologies = can destroy the value of an existing technology and create new markets
Knowledge (information, intelligence, expertise) = is gained through experience, observation
and inference
Strategic flexibility = a set of capabilities used to respond to various demands and opportunities
existing in a dynamic and uncertain competitive environment

3. The I/O model of above-average returns

Core assumption: the firm’s external environment should have more influence on the choice
of strategies than do the firm’s internal resources, capabilities and core competencies (RCCc).

Strategy: choose the right industry + adapt to industry’s conditions

Assumptions (4):

1) The external environment is assumed to impose pressures and constraints that determine
the strategies that would result in above-average returns.
2) Most firm competing within an industry or within a segment of that industry are assumed to
control similar strategically relevant resources and to pursue similar strategies in light of those
resources.
3) Resources used to implement strategies are assumed to be highly mobile across firms.
4) Organizational decision makers are assumed to be rational and committed to acting in the
firm’s best interests.

Steps for the I/O model to get above-average returns (5):

 Study the external environment (general+industry+competitor), especially the industry


environment
 Locate an industry with high potential for above-average returns
 Identify the strategy called for by the attractive industry to earn above-average returns
 Develop or acquire assets and skills needed to implement the strategy. A+S
 Use the firm’s strengths (its developed or acquired assets and skills) to implement the
winning strategy. => ABOVE-AVERAGE RETURNS

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4. The RBV (resource-based view) model of above-average returns

Resources = inputs into a firm’s production process, such as capital equipment, the skills of
individual employees, patents, finances, and talented managers
Capabilities = the capacity for a set of resources to perform a task or an activity in an
integrative manner
Core competencies = capabilities that serve as a source of competitive advantage for a firm
over its rivals

Core assumption: the firm’s unique resources, capabilities and core competencies should
have more of an influence on selecting and using strategies than does the firm’s external
environment.

Strategy: utilize firm resources to generate CA + not all resources can gain CA!

Assumptions (3):

1) Firms acquire different resources and develop unique capabilities based on how they
combine and use the resources.
2) Resources and capabilities are not highly mobile across firms.
3) The differences in resources and capabilities are the basis of CA.

Steps for the RBV to get above-average returns (5):

1) Identify the firm’s resources. Study its strengths and weaknesses compared with those
of competitors.
2) Determine the firm’s capabilities. What do the capabilities allow the firm to do better
than its competitors?
3) Determine the potential of the firm’s resources and capabilities in terms of a
competitive advantage (ability of a firm to outperform its rivals).
4) Locate an attractive industry.
5) Select a strategy that best allows the firm to utilize its resources and capabilities relative
to opportunities in the external environment. => ABOVE-AVERAGE RETURNS

NOT ALL RESOURCES CAN GAIN CA!


Resources and capabilities have to be:
A. VALUABLE = they allow a firm to take advantages of opportunities or neutralize
threats in its external environment
B. RARE = possessed by few (if, any) current and potential competitors
C. COSTLY TO IMITATE = other firms cannot obtain them/can obtain them but
with disadvantageous costs
D. NONSUBSTITUTABLE = they have no structural equivalents

ALL 4 LEAD TO CORE COMPETENCIES! I/O, RBV – COMPLEMENTARY!

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5. VISION VS. MISSION

***Concepts:

Vision = a picture of what the firm wants to be and, in broad terms, what it wants to
ultimately achieve
Mission = specifies the business or businesses in which the firms intends to compete and
the customers it intends to serve

Vision = ENDURING; it reflects a firm’s values and aspirations; it is the foundation for
the firm’s mission
Mission = CAN CHANGE in light of changing environmental conditions

e.g. RyanAir
V: to firmly establish itself as Europe’s leading low-fares scheduled passenger airline
M: aims to offer low fares that generate increased passenger traffic while maintaining a
continuous focus on cost-containment and operating efficiencies

6. CASE: Airbus vs. Boeing

- Predictions
- 5 elements of strategy
- Critical resources and capabilities

Airbus Boeing
Arenas All airlines
Vehicles Internal development Alliances with suppliers
Staging (next long-
A380 B787
distance aircraft)
Lower cost for hub- Lower costs for point-to- point
Differentiators
based travel travel
Airlines want commercially
Airlines want lower
Economic logic viable solution for point- to-
per- passenger cost
point travel

++++++++ EFFICIENCY (ALIGNMENT 5 ELEMENTS OF STRATEGY) VS.

EFFECTIVENESS (ECONOMIC LOGIC)

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Airbus Boeing
Alliance network with
Resource Subsidies from EU governments
suppliers:
Reduces the financial burden of Makes technological
Advantage
technological innovation innovation faster and cheaper
Political pressures from
Challenge Coordination problems
governments
Capability to cope with political Capability to effectively
Solution
pressures manage alliances

7. Stakeholders (book)

Stakeholders = individuals and groups who can affect the firm’s vision and mission, are
affected by the strategic outcomes of the firm achieved through its operations, and who have
enforceable claims on the firm’s performance.
- Capital market stakeholders = shareholders + major suppliers of capital
- Product market stakeholders = primary customers, suppliers, host communities
and unions representing the workforce
- Organizational stakeholders = employees = both managerial and non-managerial
personnel
- Societal stakeholders = local/regional government, country level/international
institutions, activists, challenge organizations

! If average returns => at least minimally satisfy each stakeholder


! If below average returns => make trade-offs that minimize the amount of support lost from
stakeholders

Strategic leaders = people located in different parts of the firm using the strategic
management process to help the firm reach its vision and mission
Organizational culture = the complex set of ideologies, symbols and core values that are
share throughout the firm and that influence how the firm conducts its business
Profit pool = entails the total profits earned in an industry at all points along the value
chain

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Session 2 – Corporate strategy

1. GE Store (business strategy vs. corporate strategy)

Corporate strategy entails the strategy of the total corporation. Business strategy entails the
strategy of a part of the corporation.

2. WHY pursue diversification?


a. Capital allocation within the group => the need for external finances becomes
less
b. Distribution of risk across different sectors
c. Economies of scope
- Managerial capabilities = competency in hiring good people
- Technological capabilities = if they have proprietary technology that can be
adopted in different lines of business
- Sales & Distribution capabilities = they can use sales & distribution channels –
makes sense to enter other businesses

Reasons for diversification

Value-Reducing
Value-Creating Diversification Value-Neutral Diversification
Diversification

 Economies of scope (RD)  Antitrust regulation  Diversifying managerial


- Sharing activities  Tax laws employment risk
- Transferring core competencies  Low performance  Increasing managerial
 Market power (RD)  Uncertain future cash flows compensation
- Blocking competitors through  Risk reduction for firm
multipoint competition  Tangible resources
- Vertical integration  Intangible resources
 Financial economies (UD)
- Efficient internal capital allocation
- Business restructuring (of assets)

Economies of scope = cost savings that the firm creates by successfully sharing some of
its resources and capabilities (operational relatedness) or transferring one or more corporate-level
core competencies that were developed in one of its businesses to another of its businesses
(corporate relatedness) SHARE / TRANSFER!!!

Corporate-level core competencies = complex sets of resources and capabilities that link
different businesses, primary through managerial and technological knowledge, experience and
expertise.

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Market power = when a firm is able to sell its products above the existing competitive
level or to reduce the costs of its primary and support activities below the competitive level, or
both SELL / REDUCE COSTS!!!

Multipoint competition = when two or more diversified firms simultaneously compete in


the same product areas or geographical markets

Vertical integration = when a company produces its own inputs (backward integration)
or owns its own source of output distribution (forward integration)

Financial economies = cost savings realized through improved allocations of financial


resources based on investments inside or outside the firm

Synergy = when the value created by business units working together exceeds the value
that those same units create while working independently

3. Unrelated vs. Related Diversification

Unrelated D. = adding businesses or products unrelated to prior expertise/competence


(GE – all the businesses contribute to GE store with their knowledge to let other businesses
benefit)

Related D. = adding businesses or products related to prior expertise/competence => multiple


parts of the business model coincide
(PEPSI – beverages + snacks => manufacturing different; marketing partially different;
sales & distribution = same; DIVERSIFICATION – to leverage certain parts of value chain by
operating in a business that overlaps))

4. When would you diversify?

o You are sure that you are better than your competitor
o An economic logic behind diversifying
o Six questions of paper can be answered positively (They influence the likelihood
of success of diversification)

I. What can our company do better than any of its competitors in its current
markets?
II. What strategic assets do we need in order to succeed in the new market?
III. Can we catch up to competitors at their own game?
IV. Will diversification break up strategic assets that need to be kept together?
V. Will we be simply a player in the new market or will we emerge a winner?
VI. What can our company learn by diversifying, and are we sufficiently
organized to learn it?

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5. DIVERSIFIED. Now what?

6. Industry analysis – Five Forces that shape competition (Porter)

e.g. Ryanair (AIRLINES)

BARGAINING POWER OF SUPPLIERS

- Suppliers usually increase prices and reduce the quality of their products
- They are powerful because substitute products aren’t available to industry firms,
suppliers’ good are critical to buyers’ marketplace success, the effectiveness of their products
assumes high switching costs for industry firms => DEPENDENCY

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THREAT OF NEW ENTRANTS

- They bring additional production capacity => less revenues, lower returns for
competing firms
Barriers to entry:
 Economies of scale (increasing ES enhances a firm’s flexibility)
 Product differentiation (the belief that a firm’s product is unique – the
firm’s service to the customer, effective advertising campaigns, being the first to the market
etc.)
 Capital requirements
 Switching costs (one-time costs customers incur when they buy from a
different supplier)
 Access to distribution channels
 Cost disadvantages independent of scale
 Government policy

++ Expected retaliation!!

BARGAINING POWER OF BUYERS - They are powerful when:


- They purchase a large portion of an industry’s total output
- The sales of the product being purchased account for a significant portion of the
seller’s annual revenues
- They could switch to another product at little, if any, cost
- The industry’s products are undifferentiated or standardized

THREAT OF SUBSTITUTE PRODUCTS (goods or services from OUTSIDE a given


industry that perform similar or the same functions as a product that the industry produces)
- They are a threat when customers face few, if any, switching costs and when the
substitute product’s price is lower OR its quality and performance capabilities are equal to OR
greater than those of the competing product.
- Solution? DIFFERENTIATION so that the substitute product isn’t attractive
anymore

INTENSITY OF RIVALRY AMONG COMPETITORS – Factors that affect the


intensity of the rivalry:
o Numerous or equally balanced competitors
o Slow industry growth
o High fixed costs or high storage costs
o Lack of differentiation or low switching costs
o High strategic stakes
o High exit barriers (specialized assets, fixed costs of exit, strategic
interrelationships, emotional barriers, government and social restrictions)

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7. How to cope with the 5 forces?

***Reduce the power of forces


Bargaining power of suppliers:
 Buy them
 What do you need must be available from multiple suppliers =
STANDARDIZED INPUTS. This way, you don’t depend just on one supplier.
Threat of new entrants:
 Differentiation/Product sophistication
Bargaining power of buyers + Competitive rivalry:
 Differentiation
 Focus strategy
Threat of substitutes:
 Increase product accessibility
*** Exploit changes in the forces
***Focus where the forces are the weakest
8. Unrelated diversification (the tale of Virgin Cola)
- Soft drinks industry analysis (5 forces) – ATTRACTIVE INDUSTRY – sales
& distribution define success
- 6 Questions for Virgin Cola / Ready-to-drink-coffee by Coke

9. The external environment (book)

General environment = is composed of dimensions in the broader society that influence


an industry and the firms within it
Segments: demographic, economic, political/legal, sociocultural, technological, physical,
global
Industry environment = the set of factors that directly influences a firm and its
competitive actions and competitive responses: the threat of new entrants, the power of suppliers,
the power of buyers, the threat of product substitutes and the intensity of rivalry among
competitors.
Opportunity = a condition in the general environment that, if exploited, helps a company
achieve strategic competitiveness.
Threat = a condition in the general environment that may hinder a company’s efforts to
achieve strategic competitiveness.

External environmental analysis – 4 parts:


- Scanning = identifying early signals of environmental changes and trends
- Monitoring = detecting meaning through ongoing observations of environmental
changes and trends
- Forecasting = developing projections of anticipated outcomes based on monitored
changes and trends
- Assessing = determining the timing and importance of environmental changes and
trends for firms’ strategies and their management

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Segments of the general environment

a. The demographic segment: population size, age structure, geographic


distribution, ethnic mix, income distribution
b. The economic segment: refers to the nature and direction of the economy in which
a firm competes or may compete
c. The political/legal segment: the arena in which organizations and interest groups
compete for attention, resources, and a voice in overseeing the body of laws and regulations
guiding the interactions among nations as well as between firms and various local governmental
agencies
d. The socio-cultural segment: concerned with a society’s attitudes and cultural
values
e. The technological segment: includes the institutions and activities involved with
creating new knowledge and translating that knowledge into new outputs, products, processes and
materials.
f. The global segment: includes relevant new global markets, existing markets that
are changing, important international political events, and critical cultural and institutional
characteristics of global market.
g. The physical environment segment: refers to potential and actual changes in the
physical environment and business practices that are intended to positively respond to and deal
with those changes

Industry = group of firms producing products that are close substitutes

Strategic group = a set of firms emphasizing similar strategic dimension to use a similar
strategy !!! Intra-strategic group competition > inter-strategic group competition

***COMPETITOR ANALYSIS
- The firm seeks to understand:
 Future objectives
 Current strategy
 Assumptions
 Strengths and weaknesses

Competitor intelligence = the set of data and information the firm gathers to better
understand and better anticipate competitors’ objectives, strategies, assumptions and capabilities.
Complementors = the network of companies that sell complementary goods or services
or are compatible with the focal firm’s own product or service

10. Corporate-level strategy (book)

Corporate-level strategy = specifies actions a firm takes to gain a competitive advantage


by selecting and managing a group of different businesses competing in different product markets

Low level of diversification => single (95% of revenue) / dominant business (70%-95%)
Moderate and high levels of diversification => related/unrelated

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Session 3 – Firm resources and competitive advantage

1. Business-level strategies:

I. COST LEADERSHIP = providing value by selling cheap

e.g. Aldi, Lidl, Ryanair

***HOW? (High volume – High bargaining power – No extras – Low cost => Low price)
Issue !!! Risk of alienating customers
Economies of scale – producing in LARGE QUANTITIES to keep the cost-per-unit at
minimum

II. DIFFERENTIATION = in a way that’s meaningful for the customer (they sell
AN EXPERIENCE)

e.g. Singapore Airlines, Apple, Audi

***HOW? R&D, training, investment – product related competences = superior


design/performance/support => Premium price
Issue !!! Customers needs and preferences change! => should be tracked closely

III. FOCUS = on a very specific, precisely defined customer (focus on exclusive niche)

e.g. corner supermarkets, Rolls Royce

***HOW? Specialization on customer – Loyal customer base => Continued business


Issue !!! Small scale, competition, finite no. of people willing to pay

IV. COST LEADERSHIP + DIFFERENTIATION

e.g. Mango, Heineken

***HOW? Products have some appeal – Costs cannot be high – Acceptable product and
price
Issue !!! Delicate balance between those two

Still 2 ways to compete despite INNOVATION, GLOBALIZATION,


TECHNOLOGY!!! (Cost leader + Differentiation)

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2. Resource-based View

Types of resources:
- Tangible / Intangible
- Heterogenous (each firm has its unique set of resources)
- Immobile (sticky, can’t easily be transferred/moved)

!!! 4 features of resources that lead to competitive advantage (V R I N-s)

V – difference in importance KLM/Pfizer


R – short supply/protected by law (biopharma, scientists)
I – difficult to copy => unique history/casual ambiguity/social complexity => no
replicate
N-s – Coca-Cola’s distribution channels (NO STRATEGIC EQUIVALENT)

Problems with RBV


 Tautology (circling reasoning) – valuable resources => CA (value-creating strategy)
 Does not apply to a dynamic environment (useful for assessment of resource base, but
provides little actionable guidance)
 Limited focus on capabilities = an organization’s ability to organize resources in order to
achieve a desired goal

CONCLUSION
Firm resources can be a basis for competitive advantage if they enable a firm to either:
- Do something that is valued by customers yet is done by no other
- Do what everyone else does but do it cheaper or at a higher perceived value

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3. ALDI CASE

(cheapest cost without


compromising the quality)

Aldi’s Resources and


Capabilities

- Small size stores,


limited operating
hours
- 25 cents for carts
- No shelves, but open crates and cases
- Narrow range of items (NO specialty/niche products) – only those items who are
sold the most)
- One package size
- 80%-90% items = private labels
- Prepackaged, weighed and bar-coded food
- Availability of non-food items at bargain prices
- Long conveyor belt
- Limited ways of payment
- Spacious self-bagging area
- No listed phone numbers, no media advertising
- Stockroom

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4. The internal organization: resources, capabilities, core competencies and competitive
advantages (book)

Global mindset = the ability to analyze, understand and manage (if in a managerial
position) an internal organization in ways that are not dependent on the assumptions of a single
country, culture or context.
Value = is measured by a product’s performance characteristics and by its attributes for
which customers are willing to pay

Conditions affecting managerial decisions about resources, capabilities and core


competencies:
1) Uncertainty = regarding characteristics of the general and the industry
environments, competitors’ actions, and customers’ preferences
2) Complexity = regarding the interrelated causes shaping a firm’s environments and
perception of the environments
3) Intraorganizational Conflicts = among people making managerial decisions and
those affected by them
Judgement = the capability of making successful decisions when no obviously correct
model or rule is available or when relevant data are unreliable or incomplete
Tangible resources = assets that can be observed and quantified
Intangible resources = assets that are deeply rooted in the firm’s history, accumulating
over time, and are relatively difficult for competitors to analyze and imitate

Tangible resources

 The firm’s borrowing capacity


FINANCIAL RESOURCES  The firm’s ability to generate internal
funds

 The firm’s formal reporting structure and


ORGANIZATIONAL RESOURCES
its formal planning, controlling, and
coordinating systems

 Sophistication and location of a firm’s plant


PHYSICAL RESOURCES and equipment
 Access to raw materials

 Stock of technology (patents, trademarks,


TECHNOLOGICAL RESOURCES
copyrights, and trade secrets)

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Intangible resources

 Knowledge
 Trust
HUMAN RESOURCES
 Managerial capabilities
 Organizational routines
 Ideas
INNOVATION RESOURCES  Scientific capabilities
 Capacity to innovate
 Reputation with customers
 Brand name
 Perceptions of product quality, durability
and reliability
REPUTATIONAL RESOURCES
 Reputation with suppliers
 For efficient, effective, supportive, and
mutually beneficial interactions and
relationships

Value chain analysis

Primary activities = are involved with a product’s physical creation, its sale and
distribution to buyers and its service after the sale
Support activities = provide the assistance necessary for the primary activities to take
place
Outsourcing = the purchase of a value-creating activity from an external supplier (when a
firm cannot create value in either an internal primary or support activity; should outsource only
to companies possessing a CA; must continuously verify that it is not outsourcing activities from
which it could create value)

5. Business-level strategy (book)

Business-level strategy = an integrated and coordinated set of commitments and actions


the firm uses to gain a competitive advantage by exploiting core competencies in specific product
markets
Generic strategy = a strategy that can be used by any organization competing in any
industry

 Effectively managing relationships with customers (3 dimensions):

 REACH – concerned with the firm’s access and connection to customers


 RICHNESS – concerned with the depth and detail of the two-way flow of
information between the firm and the customer
 AFFILIATION – concerned with facilitating useful interactions with customers

 WHO: determining the customers to serve

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Market segmentation = a process used to cluster people with similar needs into individual
and identifiable groups (based on various factors: demographic, socioeconomic, geographic,
psychological, consumption patterns, perceptual / industrial markets factors)

 WHAT: determining which customers needs to satisfy


 HOW: determining core competencies necessary to satisfy customer needs

Essence of business-level strategy: choosing to perform activities differently or to


perform different activities in order to create differences between the firm’s position in an industry
and those of its competitors

Types of business-level strategies:


- Cost leadership
- Differentiation
- Focus cost leadership
- Focus differentiation
- Integrated cost leadership/differentiation

Competitive scope = a narrow (broad) competitive scope means that the firm intends to
serve the needs of a narrow (broad) target customer group

Cost leadership strategy = an integrated set of actions taken to produce goods or services
with features that are acceptable to customers at the lowest cost, relative to that of competitors
Primary activities: inbound logistics, operations, outbound logistics, marketing, sales,
services

Five Forces:
Rivalry with existing competitors – Because of this advantageous position, rivals hesitate
to compete on the basis of price, especially before evaluating the potential outcomes of such
competition.
Bargaining power of buyers – Powerful customers can force a cost leader to reduce its
prices, but not below the level at which the cost leader’s next-most-efficient industry competitor
can earn average returns => that competitor will exit the market => less competition => customers
lose their power and pay higher prices because they are forced to purchase from a single firm
operating in an industry without rivals
Bargaining power of suppliers – Cost leaders seek to increase their margins as a result of
driving their costs lower => consequence: absorb suppliers’ price increases or force suppliers to
hold down their prices => reduces the supplier’s margin
Potential entrants – Improving levels of efficiency = barrier for new competitors
Product substitutes – Can reduce the price of the good/service to keep the customers

Competitive risks associated:


- A loss of competitive advantage to newer technologies
- A failure to detect changes in customers’ needs
- The ability of competitors to imitate the cost leader’s competitive advantage
through their own strategic actions

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Differentiation strategy = an integrated set of actions taken to produce goods or
services (at an acceptable cost) that customers perceive as being different in ways that are
important to them

Rivalry with existing competitors – Customers tend to be loyal purchasers of products


differentiated in ways that are meaningful to them => as their loyalty increases, the sensitivity to
price increases is reduced. The relationship between brand loyalty and price sensitivity insulates a
firm from competitive rivalry.
Bargaining power of buyers – The uniqueness of differentiated goods or services reduces
customers’ sensitivity to price increases. Customers are willing to accept a price increase when a
product still satisfies their perceived unique needs better than does a competitor’s offering.
Bargaining power of suppliers – Because the firm charges a premium price => suppliers
must provide high-quality products, which are expensive. BUT higher margins given the premium
price allow the firm to pay the suppliers (linked to customers’ insensitivity)
Potential entrants – Customer loyalty + the need to overcome the uniqueness of a
differentiated product = BARRIERS
Product substitutes – If brand loyalty is strong, there are no issues. If no => customers
might switch to substitutes for a lower cost/more attractive products.

Competitive risks associated:


- A customer group’s decision that the differences between the differentiated product
and the cost leader’s goods or services are no longer worth a premium price
- The inability of a differentiated product to create the type of value for which
customers are willing to pay a premium price
- The ability of competitors to provide customers with products that have similar
features to those of the differentiated product, but at a lower cost
- The threat of counterfeiting, whereby firms produce a cheap ‘knock-off’ off a
differentiated good or service.

Focus strategy = an integrated set of actions taken to produce goods or services that
serve the needs of a particular competitive segment
- a particular buying group (old people)
- a different segment of a product line (professional painters)
- a different geographic market

Focused cost leadership strategy – IKEA


Focused differentiation strategy – GIORGIO ARMANI

Competitive risks of focus strategies:


- A competitor’s ability to use its core competencies to ‘outfocus’ the focuser by
serving an even more narrowly defined market segment
- Decisions by industry-wide competitors to focus on a customer group’s
specialized needs
- A reduction in differences of the needs between customers in a narrow market
segment and the industry-wide market

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Integrated cost leadership/differentiation strategy = involves engaging in primary
and support activities that allow a firm to simultaneously pursue low cost and differentiation
e.g. Zara

Flexible manufacturing systems – increase the flexibility of human, physical and


information resources
Information networks
Total quality management (TQM) = a managerial innovation that emphasizes an
organization’s total commitment to the customer and to continuous improvement of every process
through the use of data-driven, problem-solving approaches based on empowerment of employee
groups and teams.
Stuck in the middle = the firm’s cost structure is not low enough to allow it to
attractively price its products and that its products are not sufficiently differentiated to create value
for the target customer = PRIMARY RISK FOR THIS TYPE OF STRATEGY

Session 4 – Mergers and acquisitions

We rarely talk about mergers. Most of the times is an acquisition because one part is
stronger than the other.

1. REASONS FOR M&A:

1) Entry to new markets (e.g. Anheuser Busch Inbev bought SabMiller – distribution channels)
2) Expansion of product portfolio (e.g. Pfizer – Anacor – takeover research about diseases)
3) Internalization of new capabilities (technological, distribution, production)
(Microsoft – Skype – MSN didn’t have the possibility to connect to landlines/traditional phones
as well as Skype – could have been done internally, but it would have taken more time)
4) Entry to new industries (corporate-level strategy)
- a premium is offered to the acquired company, but first the acquirer evaluates the
potential targets

***First 3 ones – business-level strategy – improve the competitive position that you have
They can all be done internally, but it takes time => acquisitions help because they don’t
require that much time.***

ENTRY TO NEW INDUSTRIES

2. COMMON MISTAKES ACQUIRERS MAKE:

A. They pay too much (e.g. Microsoft – LinkedIn)


Acquisition premium = acquisition price – market value (of the target)
Synergy = value created – acquisition premium
If acquisition premium < value created => synergy < 0
Importance of AGENCY THEORY – aligning managers incentives with the ones of
the shareholders

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B. Cultural misfit (e.g. Mercedes Benz – Chrysler)

Differences between the two companies => divergent focus

Mercedes:
- Quality
- Very hierarchical company
- Favored detailed planning and precise implementation

Chrysler:
- Competitive prices
- Egalitarian company
- Favored trial-and-error

C. Improper due diligence (e.g. Hewlett – Packard – Autonomy)

Due diligence: A comprehensive appraisal of a business performed by the buyer, to


establish its assets and liabilities and evaluate its commercial potential

D. Faulty economic logic (e.g. Ebay – Skype)

3. POST-ACQUISITION INTEGRATION

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4. Acquisition
capability:
The role of
Experience
(learning by doing; the
more we do it, the better
we get at it)

How does experience in past acquisitions impact the performance of future acquisitions?

Negative transfer – when a new situation is perceived as being similar to a past situation,
even though the two situations are structurally different
!!! Even if acquisitions seem similar on the surface, each acquisition is unique and
requires unique management practices

GROCERY INDUSTRY
(industry with average level of
attractiveness)

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5. CASE: Amazon eats Whole-Foods

2 questions:
1. How can Amazon make money from the deal?

 Expansion in online grocery market


 Lower costs by applying automation technology and supply chain expertise (AT, SCE)
 Use customer data:
- To improve sales through Amazon
- To sell some higher margin ‘impulse’ items at Whole Foods (HMII)

2. What are the risks for Amazon?


 Other grocers (Walmart, Target) can respond with similar moves.
 Amazon acquired a network of retail stores as well as a brand with a
particular reputation. Can Amazon capitalize on the latter?
 Will the gains be enough to offset the substantial acquisition premium?

Acquisitions can be quick ways to enhance competitiveness if:

 There is a suitable target that serves the purpose


 The purpose makes economic sense
 The price is less than the potential value to be created
 There is a plan for what happens the day after
 All of the above are based on credible analyses

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6. Mergers and acquisitions (book)

Merger = a strategy through which two firms agree to integrate their operations on a
relatively coequal basis (RCB)
Acquisition = a strategy through which one firm buys a controlling, or 100 per cent,
interest in another firm with the intention of making the acquired firm a subsidiary business
within its portfolio
Takeover = a special type of acquisition strategy wherein the target firm does not solicit
the acquiring firm’s bid

Reasons for acquisitions


a) Increased market power – 3 ways of doing that:
 Horizontal acquisition – the acquisition of a competing company in the
same industry as the acquiring firm
 Vertical acquisition – the acquisition of a supplier/distributor of one or
more of the acquiring firm’s goods or services
 Related acquisition – the acquisition of a firm in a highly related industry
b) Overcoming entry barriers – how?
 Cross-border acquisitions – acquisitions made between companies with
headquarters in different countries
c) Costs of new product development and increased speed to market
d) Lower risk compared to developing new products
e) Increased diversification
f) Reshaping the firm’s competitive scope
g) Learning and developing new capabilities

Problems with acquisitions


a) Integration difficulties
b) Inadequate evaluation of target
Due diligence = a process through which a potential acquirer evaluates a target
firm for acquisition
c) Large or extraordinary debt
Junk bonds = a financing option through which risky acquisitions are financed
with money (debt) that provides a large potential return to lenders (bondholders)
d) Inability to achieve synergy
Private synergy = is created when combining and integrating the acquiring and
acquired firms’ assets yields capabilities and core competencies that could not be
developed by combining and integrating other firms’ assets with another company
e) Too much diversification
f) Managers overly focused on acquisitions
g) Too large

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Characteristics of EFFECTIVE ACQUISITIONS

(1) The acquiring and target firms have complementary resources that are the foundation
for developing new capabilities.
(2) The acquisition is friendly, thereby facilitating integration of the firms’ resources.
(3) The target firm is selected and purchased based on thorough due diligence
(4) The acquiring and target firms have considerable slack in the form of cash or debt
capacity.
(5) The newly-formed firm maintains a low or moderate level of debt by selling off
portions of the acquired firm or some of the acquiring firm’s poorly performing units.
(6) The acquiring and acquired firms have experience in terms of adapting to change.
(7) R&D and innovation are emphasized in the new firm.

Restructuring = strategy through which a firm changes its set of businesses or its
financial structure
Downsizing = a reduction in the number of a firm’s employees and sometimes in the
number of its operating units (short-term cost reductions => expense of long-term success, because
of the loss of valuable human resources and knowledge and overall corporate reputation)
Downscoping = refers to divestiture, spin-off, or some other means to eliminating
businesses that are unrelated to a firm’s core business (reduces diversification)
Leveraged buyout = a restructuring strategy whereby a party (typically a private
equity firm) buys all of a firm’s assets in order to take the firm private (types: management buyouts,
employee buyouts, whole-firm LBOs)

Restructuring’s primary goal = gaining or re-establishing effective strategic control of


the firm. Downsizing – best.

Session 6 – Strategic alliances

1. General view

Definition: voluntary arrangements between two or more firms to jointly undertake an


economic activity
Useful for:
- Pooling complementary resources and capabilities
e.g. Daimler (mechanical engineering) and Swatch (design capabilities)
- Acquiring technological and market knowledge
e.g. of knowledge transfer GM (US market knowledge) and Toyota (production
system)
- Accessing new markets
e.g. airlines alliances

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2. Problems and remedies

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3. Managing strategic alliances (PAPER)

There are 3 phases:

(a) Formation
- Partner complementarity (non-overlapping contributions)
- Commitment (willingness to make resource contribution + short-term sacrifices
that lead to long-term success)
- Compatibility (fit between partners’ working styles and cultures)

(b) Design
- Equity
- Importance of contracts

(c) Postformation
- Managing coordination (programming, hierarchy, feedback)
- Developing trust

There are 3 main building blocks underlying the development of alliance capability in
firms:
- Prior alliance experience (learning by doing)
- Creation of a dedicated alliance function
- Implementation of firm-level processes to accumulate and leverage alliance
management know-how and skills (codify know-how)

4. Cooperative strategy (BOOK)

Cooperative strategy = a strategy in which firms work together to achieve a shared


objective
Strategic alliance = a cooperative strategy in which firms combine some of their resources
and capabilities to create a competitive advantage

Three types of strategic alliances

a) Joint venture = two or more firms create a legally independent company to share
some of their resources and capabilities to develop a competitive advantage
b) Equity strategic alliance = two or more firms own different percentages of the
company they have formed by combining some of their resources and capabilities to create a
competitive advantage
c) Nonequity strategic alliance = two or more firms develop a contractual-relationship
to share some of their unique resources and capabilities to create a competitive advantage
=> outsourcing

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Reasons for strategic alliances by market type

MARKET REASON

 gain access to a restricted market


 establish a franchise in a new market
Slow-cycle
 maintain market stability (e.g. establishing standards)

 speed up development of new goods and services


 speed up new market entry
 maintain market leadership
Fast-cycle  form an industry technology standard
 share risky R&D expenses
 overcome uncertainty
 gain market power (reduce industry overcapacity)
 gain access to complementary resources
 establish better economies of scale
Standard-cycle  overcome trade barriers
 meet competitive challenges from other competitors
 pool resources for very large capital projects
 learn new business techniques

*Business-level cooperative strategy = to grow and improve its performance in individual


product markets (4)

1. Complementary strategic alliances = business-level alliances in which firms share some


of their resources and capabilities in complementary ways to develop competitive advantages (can
be vertical or horizontal) – highest probability
Vertical = firms share their resources and capabilities from different stages of the value chain
to create a competitive advantage
Horizontal = … from the same stage(s)

2. Competition-responding strategies

3. Competition-reducing strategies (avoid excessive competition) – lowest probability

Explicit collusion = when two or more firms negotiate directly with the intention of jointly
agreeing about the amount to produce and the price of the products that are produces
Tacit collusion = when several firms in an industry indirectly coordinate their production and
pricing decisions by observing each other’s competitive actions and responses

4. Uncertainty-reducing strategies (used to hedge against the risks created by the conditions
of uncertain competitive environments = new product markets)

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*Corporate-level cooperative strategy = helps diversifying in terms of products offered or
markets served, or both

3 types:

Diversifying strategic alliance = firms share some of their resources and capabilities to
diversify into new products or market areas

Synergistic strategic alliance = firms share some of their resources and capabilities to create
economies of scope

Franchising = a firm (the franchisor) uses a franchise a contractual relationship to describe


and control the sharing of its resources and capabilities with the partners (franchisers)

*International cooperative strategy

Cross-border strategic alliance = firms with headquarters in different nations decide to


combine some of their resources and capabilities to create a competitive advantage (riskier than
domestic ones)

*Network cooperative strategy = cooperative strategy wherein several firms agree to form
multiple partnerships to achieve shared objectives
Primary benefit: the firm’s opportunity to gain access to its partner’s other partnerships.
They are used to form a stable alliance network or dynamic alliance network.

Stable alliance network = formed in mature industries where demand is relatively constant
and predictable
Dynamic alliance network = used in industries characterized by frequent product innovation
and short product life cycles

!!! Cooperative strategies = not RISK FREE. Importance of TRUST!

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