Gaining and Sustaining

Competitive Advantage
Firm' strategy shouId deveIop and expIoit vaIuabIe,
rare and costIy-to-imitate resources, Ieading to
sustained competitive advantage and above
normaI performance
!reIiminaries
Strategy formuIation, not impIementation
No 'siIver buIIet', 'magic formuIa'
A bit of Iuck
!roactive vs. reactive
%he Many Definitions of Strategy
.a firm's theory about how to compete successfuIIy. (J.
Barney)
.the way to achieve organizationaI objectives. (Hatten &
Hatten)
.commitments and actions designed to expIoit core
competencies and gain competitive advantage. (Hitt,
IreIand & Hoskisson)
.a pIan that specifies which choices (the pIayer) wiII make
in every possibIe situation. (Von Neumann & Morgenstern)
Competitive advantage - when strategy (1) is consistent
with underIying economic processes, (2) creates vaIue, and
(3) is unique or rare.
Competitive parity - when strategy (1) is consistent with
underIying economic processes, (2) creates vaIue, but (3) is
349 unique or rare
Competitive disadvantage - when strategy faiIs to create
economic vaIue.
Strategy and Competitive Advantage
GeneraI ModeI of Strategic Management
Mission Objectives Strategies %actics
Company !rofiIe
( SWO% )
Industry & EnvironmentaI
AnaIysis ( SWO% )
GeneraI ModeI of Strategic Management
Mission - FundamentaI purpose, how firm differs from its
rivaIs
Objectives - MeasurabIe performance targets, financiaI
and/or strategic
Strategies - means, pIans or commitments to achieve a
firm's mission and objectives
%actics - Actions or poIicies to impIement strategy
Company !rofiIe - strengths and weaknesses of a firm
EnvironmentaI AnaIysis - opportunities, threats,
characteristics and trends of the industry and society
Benefits of having a mission statement
÷ unanimity of purpose
÷ empIoyee motivation
÷ cuIture / focaI identity
÷ aIIocating resources
Disadvantages of mission statement?
Improved performance?
Why don't aII companies have mission statements?
Mission Statements
%ypicaI Components of a Mission Statement
!rimary market or technoIogy
GoaIs: growth, profitabiIity, survivaI
Basic beIiefs, company phiIosophy
!ubIic image, seIf-concept
Customers
QuaIity
Geisinger's Mission Statement
"Enhancing quaIity of Iife through an integrated heaIth service
organization based on a baIanced program of patient care,
education, research and community service."
Nike's Mission Statement
"%o bring inspiration and innovation to every athIete in the
worId."
Southwest AirIine's Mission Statement
'%he mission of Southwest AirIines is dedication to the highest
quaIity of customer service deIivered with a sense of
warmth, friendIiness, individuaI pride, and company spirit".
DeII's Mission Statement
DeII's mission is to be the most successfuI computer company
in the worId at deIivering the best customer experience in
markets we serve. In doing so, DeII wiII meet customer
expectations of:
Highest quaIity
Leading technoIogy
Competitive pricing
IndividuaI and company accountabiIity
Best-in-cIass service and support
FIexibIe customization capabiIity
Superior corporate citizenship
FinanciaI stabiIity
&NLV's Mission Statement
%he &niversity of Nevada, Las Vegas, Iocated in the vibrant and dynamic city of Las Vegas and
surrounded by the Mojave Desert, is emerging as a premier urban university. &NLV's deveIopment
embraces the traditionaI vaIues of higher education adapted for the gIobaI community of the 21
st
century. %he university increasingIy wiII concentrate its resources on programs that are student
centered, demonstrabIy exceIIent, and responsive to the needs of the IocaI and regionaI
community.
&NLV promotes an environment that encourages the fuII personaI and professionaI deveIopment of
those it serves and of those who serve the university. &NLV assists students in meeting the
inteIIectuaI and ethicaI chaIIenges of responsibIe citizenship and a fuII and productive Iife through
opportunities to acquire the knowIedge and common experiences that enhance criticaI thinking,
Ieadership skiIIs, aesthetic sensitivity, and sociaI integrity.
%he university provides traditionaI and professionaI academic programs for a diverse student body and
encourages innovative and interdiscipIinary approaches to teaching, Iearning, and schoIarship.
Recognizing the individuaIity of each student, &NLV simuItaneousIy engenders coIIegiaI
reIationships and a sense of community among its members. &NLV embraces the interdependence
of quaIity instruction, schoIarIy pursuits, and substantive invoIvements in campus and community
Iife.
%he university offers artistic, cuIturaI, and technicaI resources and opportunities to the broadest
possibIe community. It promotes research programs and creative activities by students and facuIty
that respond to the needs of an urban community in a desert environment.
&NLV is committed to deveIoping a synergy between professionaI and IiberaI studies, between
undergraduate education and graduate programs, and between superior teaching and meaningfuI
research. &NLV increasingIy is a dynamic resource for, and partner with, the community that it
serves.
Items Examined in the Company !rofiIe
%he generaI strengths and weaknesses of a firm
!erformance and FinanciaI position
Leadership
Org. structure
CuIture
Strategic issues by functionaI area
VaIue chain
Industry and EnvironmentaI AnaIysis
Opportunities, threats, characteristics and trends of the
industry and society
Industry characteristics anaIysis
!orter's Five Forces ModeI
Stage of industry evoIution
StakehoIder anaIysis
EnvironmentaI assessment
Competitor anaIysis
!urpose of setting Objectives is to:
÷ convert mission into performance targets
÷ create yardsticks to track performance
÷ estabIish goaIs that require stretch
÷ push firm to be inventive, focused
Setting Objectives
Set chaIIenging but achievabIe objectives, but guard
against:
÷ CompIacency
÷ Drift
÷ InternaI confusion
÷ Status quo performance
FinanciaI and strategic objectives
Setting Objectives
FinanciaI Objectives
Objectives that reIate to improving firm's financiaI
performance
ExampIes
÷ increase ROI from 15% to 20%
÷ maintain AA bond rating
÷ increase earnings growth from 10% to 15%
÷ Other exampIes?
Strategic Objectives
Improvement in competitiveness or market position
ExampIes
÷ Increase market share from 15% to 18%
÷ Surpass rivaIs on customer service
÷ Achieve Iower cost than competitors
÷ Achieve technoIogicaI superiority
÷ Other exampIes?
%ypes of Strategies
Business strategies (competitive)
Corporate strategies (aIIiances, M & A)
!orter's generic strategies - " .the generaI strategic
orientation of the firm."
÷ Cost Ieadership
÷ Differentiation
÷ Focus or niche
Emergent strategies
%actics
Actions to impIement strategy
!oIicies and procedures to get Iine empIoyees to foIIow the
firm's strategy
"Messy" issues of strategy impIementation, not formuIation
Measuring !erformance
OrganizationaI performance is a compIicated
concept - muItipIe methods, each with different
uses and fIaws
MuItipIe Measures of !erformance
ExampIe !ros Cons
SurvivaI Easy to appIy Bankruptcy or "Death" of
a firm
StakehoIder ConceptuaIIy sound DifficuIt to appIy
Accounting
Measures
!opuIar,
EasiIy understood
ManageriaI discretion,
Short-term bias,
intangibIe resources
Adjusted
Accounting
methods
Accuracy,
ComparabiIity
Measurement probIems,
CA!M, intangibIe
resources
Measures of How WeII
!resent Strategy is Working
"!erformance %est" (%hompson & StrickIand)
÷ Strategy fits firm's environment
÷ BuiIds competitive advantage
÷ Improves strategy performance measures
Common measures of strategy performance
÷ Change in firm's market share
÷ %rend in profit margins reIative to rivaIs or industry average
÷ Composite measures of financiaI strength
÷ %rend in firm's stock price
÷ Firm's reputation with its customers
÷ !roduct quaIity
÷ Service quaIity
÷ EmpIoyee satisfaction / moraIe
Accounting Measures of !erformance:
Liquidity Ratios
%he abiIity of a company to meet its short-term obIigations.
Current ratio
Current assets
Current IiabiIities
Quick ratio
Current assets - inventory
Current IiabiIities
Accounting Measures of !erformance:
SoIvency Ratios (Leverage)
AbiIity to meet Iong term debt payment
Debt to assets
%otaI debt
%otaI assets
Debt to equity
%otaI debt
SharehoIders equity
%imes interest earned
EBI%
%otaI interest charges
Leverage ExampIe
Assumptions:
50 shares outstanding
Option A: borrow $100 @ 10 %
Option B: seII 50 shares @ $2
Option A Option B Option A Option B
SaIes 100 100 80 80
Cost of Goods 65 65 52 52
Gross !rofit 35 35 28 28
Admin. 10 10 10 10
Interest exp 10 0 10 0
Net !rofit 15 25 8 18
Shares Outstanding 50 100 50 100
!rofit / share 0.30 0.25 0.16 0.18
Good Year Bad Year
Accounting Measures of !erformance:
Funds Management / Activity Ratios
How the company's investment in productive assets is managed
Inventory turnover
Cost of goods soId
Average inventory
Accounts receivabIe turnover
AnnuaI credit saIes
Accounts receivabIe
Average coIIection period
Accounts receivabIe
Average daiIy saIes
Accounting Measures of !erformance:
!rofitabiIity Ratios
!rofit or return on operations
Return on assets (ROA)
!rofit
%otaI assets
Return on equity
!rofit
StockhoIders equity
Earnings per share (E!S)
!rofit
# shares outstanding
Gross profit margin
SaIes - cost of goods soId
saIes
Adjusted Accounting Measures of !erformance
Return on invested capitaI (ROIC)
Economic profit (E!)
Market vaIue added (MVA)
%obin's 6
Note: these measures can be difficuIt to compute
and more appropriate to finance than
strategy. Our interest is in deveIoping
an intuitive understanding - how they
compare, contrast and can be used.
Return on Invested CapitaI
%he return or profit a firm makes on the investment it has in
its operations
+ current assets
+ fixed assets
- net other assets (other assets - other IiabiIities)
- non-interest bearing current IiabiIities (A.!.)
Invested capitaI
Economic !rofit
Reports, in doIIar terms, the actuaI economic profit the firm
made
E! = Invested capitaI x (ROIC - WACC)
note: ROIC and WACC are percentage terms.
If the difference is positive, E! wiII aIso be
positive.
Market VaIue Added
Measure that characterizes the Iong-term performance of a
firm
market vaIue of equity
+ market vaIue of debt
- economic book vaIue
MVA
note: this measure is aIso difficuIt to caIcuIate,
especiaIIy determining the amount invested
in the firm since inception.
%obin's 6
Ratio of a firm's market vaIue to repIacement cost of its
assets
6 = firm market vaIue / firm book vaIue
where market vaIue of common stock
+ market vaIue of preferred stock
+ book vaIue of short-term debt
+ book vaIue of Iong=term debt
firm market vaIue
Industry and sector data often readiIy avaiIabIe
Comparison with past performance
Stage of industry evoIution
Benchmarking with competitors
&S and industry averages
Industry success factors
Make MeaningfuI Comparisons
EvaIuating EnvironmentaI %hreats
A firm's strategy shouId neutraIize
environmentaI threats.
GeneraI ModeI of Strategic Management
Mission Objectives Strategies %actics
Company !rofiIe
( SWO% )
Industry & EnvironmentaI
AnaIysis ( SWO% )
EvaIuating EnvironmentaI %hreats
Origins of the Structure - Conduct - !erformance ModeI
%ooIs to evaIuate environmentaI threats
÷ Industry characteristics anaIysis
÷ StakehoIder anaIysis
÷ !orter's Five Forces ModeI
÷ Competitor anaIysis
%he Structure - Conduct - !erformance ModeI
Industry
Structure
Firm
Conduct
!erformance
Number of competing firms,
homogeneity of products,
cost of entry and exit
!rice taking, product
differentiation, tacit coIIusion,
expIoit market power
Firm: above, normaI, beIow
Society: sociaI weIfare
impIications
%ype of Industry = !erfect Competition
Industry
Structure
Firm
Conduct
!erformance
Large number of firms,
homogeneous products,
Iow cost of entry and exit
!rice taking
Firm: normaI
SociaI weIfare: maximized
Industry ExampIes?
%ype of Industry = MonopoIistic Competition
Industry
Structure
Firm
Conduct
!erformance
Large number of firms,
heterogeneous products,
Iow cost of entry and exit
Cost Ieadership,
!roduct differentiation
Firm: above normaI
SociaI weIfare: Iess than
perfect competition
Industry ExampIes?
%ype of Industry = OIigopoIy
Industry
Structure
Firm
Conduct
!erformance
SmaII number of firms,
costIy entry and exit
Many options, incIuding
coIIusion
Firm: above normaI
SociaI weIfare: Iess than
monopoIistic competition
Industry ExampIes?
%ype of Industry = MonopoIy
Industry
Structure
Firm
Conduct
!erformance
OnIy one competing firm,
costIy entry
&ses market power to set
prices
Firm: above normaI
SociaI weIfare: Iess than
oIigopoIy
Industry ExampIes?
Industry Characteristics AnaIysis
Market size
Market growth rate
Number and size of rivaIs
Scope of rivaIry
Number and size of buyers
Number and size of
suppIiers
Substitute products
Ease of entry / exit
Distribution channeIs
Economies of scaIe
Learning curve
Capacity utiIization
Average industry
profitabiIity
!ace of technoIogicaI
change
StakehoIder AnaIysis
!eopIe or groups who have an interest, cIaim, or stake in how
weII the firm performs
sharehoIders managers
empIoyees customers
suppIiers government
unions community
generaI pubIic
EvaIuating EnvironmentaI %hreats:
!orter's Five Forces ModeI
%hreat of
entry
%hreat of
suppIiers
%hreat of
buyers
%hreat of
substitutes
%hreat of
rivaIry
What determines the degree of industry competition
and profitabiIity?
Industry
profitabiIity
!orter's Five Forces ModeI
Barriers to Entry
Economies of scaIe
!roduct differentiation
Cost advantages independent of size
(%echnoIogy, know-how, access to raw materiaIs,
geographic Iocations, Iearning curve)
Contrived deterrence
Government poIicy
CapitaI requirements *
Switching costs *
Access to distribution channeIs *
* Some disagreement among schoIars
!orter's Five Forces ModeI
Intensity of RivaIry
Many competitors
SimiIar in size
SIow rate of industry growth
!roduct Iacks differentiation
Capacity added in Iarge increments
High IeveI of fixed costs
Exit barriers are high
Reputation or past history
!orter's Five Forces ModeI
Substitute !roducts
!roducts that appear to be different but satisfy the same
need
Customer switching costs are Iow
÷ good exampIes butter vs. margarine
caIcuIators vs. sIide ruIes
tape b/u vs. CD burner
÷ bad exampIes Coke vs. !epsi
Honda vs. %oyota
!orter's Five Forces ModeI
Bargaining !ower of Buyers/Customers
SmaII number of buyers
!urchase products that are standard or undifferentiated
Industry products represent a Iarge share of buyer's totaI
cost
&nimportant to finaI quaIity of product
!roduct does not save the buyer money
Buyer may integrate backward
SuppIier has few competitors
SuppIier offers a unique product
Substitutes not readiIy avaiIabIe
SuppIier can integrate forward
Firm or industry purchases represent smaII share of
suppIier's totaI saIes
!orter's Five Forces ModeI
Bargaining !ower of SuppIiers
EvaIuating EnvironmentaI Opportunities
A firm's strategy shouId expIoit
environmentaI opportunities
GeneraI ModeI of Strategic Management
Mission Objectives Strategies %actics
Company !rofiIe
( SWO% )
Industry & EnvironmentaI
AnaIysis ( SWO% )
EvaIuating EnvironmentaI Opportunities
Separation of opportunities and threats
%ooIs to evaIuate environmentaI opportunities
÷ Industry structure
÷ Industry evoIution
÷ Strategic group anaIysis
÷ EnvironmentaI assessment
EnvironmentaI Opportunities and Industry Structure
Industry structure Opportunity
Fragmented Economies of scaIe through
consoIidation
Networking First mover or "winner take
aII" strategies
Hyper-competitive FIexibiIity
!roactive disruption
Empty-core CoIIusion
Government reguIation
!roduct differentiation
EnvironmentaI Opportunities and
Stage of Industry EvoIution
Determinants of success may differ depending on the stage of
industry evoIution
Emerging
Growth
Maturity
Decline
NewIy formed - innovations,
changes in demand, needs
Rapid increases in capacity and
unit saIes, dominant technoIogy
emerges
SIowing growth rate, increased
competition, experienced
customer base.
Consistent decIine in unit saIes,
overcapacity
What does it take to succeed in the
Introduction / Emerging stage?
W %echnoIogicaI Ieadership
Experience curve
Dominant technoIogy
W !reempt strategicaIIy vaIuabIe assets
W Create customer switching costs / IoyaIty
Industry ExampIes?
Strategies and Stage of Industry EvoIution:
Emerging
Strategies and Stage of Industry EvoIution:
Growth Stage
What does it take to succeed in the growth stage?
W Marketing and promotion aimed at brand recognition
W Expanding the product Iine
W FinanciaI strength to accommodate growth
W Strong marketing channeIs
Industry ExampIes?
Strategies and Stage of Industry EvoIution:
Mature
What does it take to succeed in the mature stage?
W !roduct refinement - extensions, packaging
W Emphasis on process innovation
Lower costs
Higher quaIity
W Differentiation / emphasis on service
W HorizontaI integration
W InternationaI expansion
Industry ExampIes?
Strategies and Stage of Industry EvoIution:
DecIine
What does it take to succeed in the decIining stage?
W Market Ieadership
W Focus on growth segments - niche strategy
W Emphasize production and distribution efficiency
W GraduaIIy harvest the business
!rune the product Iine
!referred customer seIection
Defer equipment maintenance and repair
W Divestment
Industry ExampIes?
EnvironmentaI Opportunities and
Strategic Group AnaIysis
Strategic group - a subset of firms in an industry that appear
to compete on simiIar dimensions.
ExampIes: Mercedes, Acura, Lexus
%imex, Casio, !oIar
Nike, New BaIance, Asics
!Iotting a strategic group map:
(1) Identify reIevant dimensions
(2) Locate firms
(3) Group nearby firms
(4) Look for potentiaI opportunities
Strategic Group Map - AthIetic Shoes
Number of ModeIs
"
:
,

9

Nike
Asics
NB
Keds
Converse
EnvironmentaI Assessment
Monitoring earIy signaIs, changes or trends in the firm's
externaI environment; anticipating or forecasting these
trends; assessing how these changes or trends wiII affect
firm operations.
Major components:
÷ Demographics
÷ Economic
÷ !oIiticaI / IegaI
÷ Socio-cuIturaI
÷ %echnoIogicaI
EvaIuating Firm Strengths and Weaknesses
A firm's strategy shouId expIoit firm strengths
whiIe avoiding or correcting weaknesses
%hree %raditionaI !erspectives on Firm'
Strengths and Weaknesses
1. %heories of distinctive competence
÷ GeneraI managers - their decisions have great impact
W !ros - high appeaI and vaIidity
W Cons - positive traits are ambiguous
÷ InstitutionaI Ieadership - creates vision, organization
and structure
W !ros - intuition, strong appeaI
W Cons - sr. managers not onIy source of advantages
%hree %raditionaI !erspectives on Firm'
Strengths and Weaknesses
2. Ricardian Economics
÷ LittIe roIe for management
÷ "OriginaI, indestructibIe gifts of nature" (Iand)
÷ IneIastic suppIy function
÷ High quaIity factors of production
÷ !ros: quantitative, testabIe theory
numerous resources are ineIastic
÷ Cons: naturaI shift in demand curve
other contributing factors
%hree %raditionaI !erspectives on Firm'
Strengths and Weaknesses
3. !enrose's %heory of Firm Growth
÷ administrative framework
÷ bundIe of productive, heterogeneous resources
÷ !ros: introduced heterogeneity
broad definition of 'productive resource'
÷ Cons:
Other theories of the firm
4. !opuIation EcoIogy
5. %ransaction cost
6. Agency theory
Resource Based View of the Firm
Dominant theoreticaI perspective
Resources, capabiIities, competencies
Assumptions
÷ Resource heterogeneity
÷ Resource immobiIity
÷ Firms are bundIes of productive resources
W FinanciaI capitaI
W !hysicaI capitaI
W Human capitaI
W OrganizationaI capitaI
Discovering Sustained Competitive Advantage:
%he VRIO Framework
VaIue - when resources and capabiIities enabIe the firm to
respond to threats and opportunities
Rarity - when resource is controIIed by a smaII number of
competing firms
ImitabiIity - the degree that the resource can be dupIicated
or substituted
Organization - how the firm is structured, organized and
managed to expIoit vaIuabIe, rare and costIy to imitate
resources.
Some exampIes
AppIying the VRIO Framework
VaIuabIe Rare
CostIy to
Imitate
Competitive
ImpIication *
Economic
!erformance
No -- -- Disadvantage
BeIow
NormaI
Yes No -- !arity NormaI
Yes Yes No
%emporary
Advantage
Above
NormaI
Yes Yes Yes
Sustained
Advantage
Above
NormaI
* Assumes firm is organized to expIoit resource
Strategy ImpIications of the Resource-based View
Broader responsibiIity for competitive advantage
Better to expIoit firm's existing vaIuabIe, rare and costIy to
imitate resources, rather than mimic other successfuI firms
ReIative cost of difficuIt to impIement strategy shouId be
compared to its vaIue
SociaIIy compIex resources can be source of competitive
advantage
Firm's structure, controI systems and compensation
poIicies shouId change if they confIict with firm' resources
or capabiIities
Limitations of VRIO Framework
Sustained competitive advantage and unexpected
environmentaI change (Shumpeterian revoIutions)
ManageriaI infIuence - imitabiIity paradox
&nit of anaIysis shifts from industry to intra-firm (consider
vaIue chain exampIe)
Generic Strategy: Cost Leadership
A cost-Ieadership strategy attempts to gain
competitive advantage by reducing production or
service costs beIow those of competitors
Sources of Cost Advantages
Economies of scaIe
÷ SpeciaIized machines
÷ Cost of pIant and equipment
÷ EmpIoyee speciaIization
÷ Overhead
Diseconomies of scaIe
÷ !hysicaI Iimits to efficient size
÷ ManageriaI diseconomies
÷ Worker motivation
÷ Distance to markets and suppIiers
Sources of Cost Advantages (cont'd.)
Learning curve
(Iearning curve v. economies of scaIe)
Access to factors of production
(Iand, Iabor, capitaI, raw materiaIs)
%echnoIogicaI hardware
(other than what is used for production)
%echnoIogicaI software
!oIicy choices
(choices about which products/services to offer)
Cost Leadership and !orter's Five Forces
Reduces threat of entry - how?
Reduces threat of rivaIry - how?
Reduces threat of substitutes - how?
Reduces threat of suppIiers - how?
Reduces threat of buyers - how?
Cost Leadership and VRIO Framework
Which Sources of Cost Advantages Are Rare?
Learning curve
Factors of production
%echnoIogicaI software
Diseconomies of scaIe
!oIicy choices
Economies of scaIe
%echnoIogicaI hardware
More IikeIy to be rare
Less IikeIy to be rare
Cost Leadership and VRIO Framework
Which Sources of Cost Advantages
Are CostIy to DupIicate?
%echnoIogicaI software
Factors of production
!oIicy choices
%echnoIogicaI hardware
Learning curve
Diseconomies of scaIe
Economies of scaIe
CostIy to dupIicate
Less costIy to dupIicate
Why Are %hese Sources CostIy to DupIicate?
Source of Advantage
%echnoIogicaI software
Factors of production
!oIicy choices
%echnoIogicaI hardware
Learning curve
Diseconomies of scaIe
Economies of scaIe
History &ncertainty
SociaI
CompIexity
very IikeIy IikeIy very IikeIy
very IikeIy -- IikeIy
Somewhat
IikeIy
-- --
--
Somewhat
IikeIy
Somewhat
IikeIy
Somewhat
IikeIy
-- --
-- -- --
-- -- --
Cost Leadership and VRIO Framework
Organizing to ImpIement Cost Leadership
SimpIe &-form structure
(few Iayers, smaII staff, narrow range of business)
%ight management controI systems
(cIose supervision, quantitative goaIs, cost-Ieadership
orientation)
Compensation poIicies
(reward for cost reduction, incentives for aII)
Generic Strategy: !roduct Differentiation
A product differentiation strategy attempts to
gain competitive advantage by increasing the
perceived vaIue of products or services
reIative to that of the competition
Bases of !roduct Differentiation
!roduct features
Intra-firm Iinkages
%iming
Location
!roduct mix
Inter-firm Iinkages
Reputation
!roduct customization
!roduct compIexity
Consumer marketing
Distribution channeIs
Service and support
ConceptuaI
EmpiricaI
!roduct Differentiation and VRIO Framework
Which Bases Are CostIy to DupIicate?
Reputation
Distribution channeIs
Intra-firm Iinkages
%iming
Location
Service and support
Inter-firm Iinkages
!roduct customization
!roduct mix
Consumer marketing
!roduct compIexity
!roduct features
CostIy to dupIicate
Less costIy to dupIicate
Why Are %hese Bases CostIy to DupIicate?
History &ncertainty CompIexity
Reputation very IikeIy LikeIy very IikeIy
Distribution channeIs LikeIy Somewhat LikeIy
Intra-firm Iinkages Somewhat Somewhat LikeIy
%iming very IikeIy Somewhat --
Location very IikeIy -- --
Service & support Somewhat Somewhat LikeIy
Inter-firm Iinkages Somewhat -- LikeIy
!roduct customization Somewhat -- LikeIy
!roduct mix Somewhat Somewhat Somewhat
Consumer marketing -- LikeIy --
!roduct compIexity Somewhat -- Somewhat
!roduct features -- -- --
ResoIving Organizing DiIemmas for !roduct
Differentiation Strategies
DiIemma !otentiaI resoIution
Intra-firm coIIaboration &-form structure
%eams
InstitutionaI controI DecentraIized decision making
EmpIoyee empowerment
Connection to the past BIend oId and new
"CuIture management"
Commitment to market vision !oIicy of experimentation
%oIerance for faiIure
ImpIementing Both Cost Leadership and
!roduct Differentiation Strategies
%he !ros...
!roduct differentiation Ieads
to increased saIes, which Iead
to economies of scaIe,
Iearning and other cost
reductions
EmpiricaI research supports
duaI strategies
!orter has backed off the
"stuck in the middIe"
argument
%he Cons...
Requires different
organizationaI structures
Management controI systems
differ
Differences in compensation
poIicy design
Strategic AIIiances
%ypes of aIIiances, sustained competitive
advantage, and "cheating" in aIIiances.
%ypes of Strategic AIIiances
AIIiances
÷ exist whenever two or more independent firms
cooperate to deveIop, manufacture or market products
or services
÷ are governance mechanisms between the spot market
and organizationaI hierarchy
÷ rapidIy growing form of governance
Non-equity AIIiances
Equity AIIiance
Joint Venture
Motivations for Strategic AIIiances:
Economies of Scope
Economies of scaIe
Learning from competitors
Sharing risks and costs
FaciIitate tacit coIIusion
Low-cost market entry
Low-cost industry entry
Low-cost exit
Managing uncertainty
"Cheating" in AIIiances
Adverse seIection - partner misrepresents skiIIs and
abiIities
MoraI hazard - partner has high quaIity skiIIs and abiIities,
but invests Iower quaIity than promised
HoIdup - partner expIoits "transaction-specific investments
that other partner(s) make
Some exampIes.
Strategic AIIiances and
Sustained Competitive Advantage
EvaIuation of competitive advantage foIIows VRIO framework.
VaIue: N!V ( firm A + firm B ) > N!V ( A ) + N!V ( B )
i.e., synergy exists
Rare: depends on the number of competing firms
as weII as the benefits.
ImitabiIity: aIIiances can be imitated by direct dupIication
and substitution
Organization: to minimize "cheating"; the key to success
OrganizationaI "%ooIs" to Manage AIIiances
ExpIicit contracts
LegaI sanctions
Equity investment
Firm reputation
Joint venture
%rust
SeIecting Appropriate Strategies
Strategy shouId neutraIize threats,
expIoit opportunities and strengths,
address firm' weaknesses
%ypes of Strategies
Business IeveI
÷ VerticaI integration
÷ Cost Ieadership
÷ !roduct differentiation
÷ FIexibiIity
÷ %acit coIIusion
Generic Strategies
Corporate strategies
÷ Strategic aIIiance
÷ Corporate diversification
÷ Mergers and acquisitions
÷ InternationaI strategies
Strategies %o Avoid
FoIIow the Ieader
Hit another home run
Arms race
Do everything
Losing hand / Sunk cost
Stuck in the middIe
Some FinaI %houghts on SeIecting the Best Strategy
Re-examine SWO% anaIysis
÷ compare expected outcomes to objectives
÷ construct corporate scenarios
Consider other behavioraI factors
÷ Current or past strategy
÷ Degree of externaI dependence
÷ Attitudes toward risk
÷ InternaI poIitics
÷ %iming
÷ Competitive reaction

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