The Strategic Management Process

External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission/Goal

Internal Analysis

CONCEPTUAL OVERVIEW The Environment “Threats & Opportunities”

GOAL

Management’s values & attitude toward risk

STRATEGY

Capabilities “Strengths & Weaknesses”

Strategic Management
• What is Management?

Strategic Management
• What is Management?
– – – – Leading Controlling Planning Organizing

Strategic Management
• What is Strategic?
• What is Management?
– Setting goals and objectives – Allocation of scarce resources – Orchestrating the behavior of organizational members – Monitoring performance

Strategic Management
• What is Strategic?
– – – – Important Critical Central Long Term

• What is Management?
– Setting goals and objectives – Allocation of scarce resources – Orchestrating the behavior of organizational members – Monitoring performance

Examples of Strategic Decisions:
• Should we enter a new market? • Should we introduce a new service? • Should we acquire a competitor? • Your decision to be here is strategic:
– What college should I attend? – Should I get married?

Important Terms
Strategic Management
Top level managers making proactive decisions regarding allocation of significant resources which will have a deciding influence on the long-term performance of the entire organization as compared to its competitors. Afterwards, orchestrating the entire organization in implementing the decision(s).

Important Terms
Strategy • A firm’s theory about how to gain competitive advantage • Unifying theme that gives coherence and direction to individual decisions of an organization.

CONCEPTUAL OVERVIEW The Environment “Threats & Opportunities” GOAL
Implementation Levers: Organization structure Systems and processes People and rewards

Management’s values & attitude toward risk

STRATEGY

Strategic Leadership:

Lever and resource allocation decisions Develop support among stakeholders

Organization’s resources and capabilities “Strengths & Weaknesses” Performance

Strategy Formulation & Implementation
Implementation Levers: Organization structure Systems and processes People and rewards

Intended STRATEGY

Strategic Leadership: Lever and resource allocation decisions Develop support among stakeholders

Realized & Emergent STRATEGY

Nature of Strategy
• Strategy leads to superior performance.
Clarity of direction Ability to recognize opportunities Ability to maneuver into a position of advantage

• Focus: for-profit organizations, i.e. firms.

Purpose of a Firm
• The purpose of a firm is to create value that meets the needs of its stakeholders. • Stakeholders: All the parties that have a stake (interest) in the success of a firm.
– Owners/Stockholders – Employees – Customers – Suppliers – Governments – Local Communities – Trade Associations – Public at Large

Stakeholder Group

Examples of Value Provided

Stockholders Customers Employees Suppliers
Local Community

Society at Large
Trade Associations

Stock price appreciation and dividends Products and services Employment, wages, personal growth opportunities Revenue through sales, growth opportunities Jobs, economic development, civic involvement Economic health and security, environmental protection Political strength, operating funds

Stakeholder View of the Firm
• Fiscal Responsibility • Social Responsibility • How can the firm meet its obligations to such a diverse set of stakeholders? • The dominant objective of a business firm is to maximize profits:
– Meeting the obligations to stockholders is a prerequisite for addressing the needs of other stakeholders in a serious and sustained manner.  Firms need to make a profit before they can devote their attention to other concerns.  A business cannot exist without a positive cash flow.

Profits
• Accounting Profits
– Net Income

• Economic Profits/Economic Rents/Economic Value Added/Rents: Income that is surplus over and above the costs of all the inputs required for production.
– real profits – most comprehensive and accurate – ultimate measure

• Net Income = EVA +Cost of Equity • Cost of Equity: Total return to a portfolio of stocks with similar risk. • Proxies for EVA: ROA, ROE, Profit Margin.

Sources of Profits
• Choice of industries/businesses ---> corporate strategy: scope of the firm in terms of industries and markets in which it competes. • Position of advantage vis-a-vis competitive forces within a particular industry.
---> business/competitive strategy

What is Strategy?
Strategy answers the question ―How can the firm make money?‖
Industry Attractiveness Which industries should we be in?
Superior Profitability How do we make money? Positioning How Should we compete? Competitive Strategy

Corporate Strategy

Levels of Strategy
Corporate-Level Managers
Corporate Strategy
Two-Way Influence

Business-Level Managers

Business Strategies
Two-Way Influence

Functional Managers

Functional Strategies

Employees

Features of Winning Strategies
• Goal-Directed. • Based upon profound understanding of the environment in which the firm operates. • Based upon objective assessment of the firm’s resources and capabilities. • Effectively implemented.

Consistency is important
• Consistency with the external environment • Consistency with resources and capabilities • Consistency with organization structure and systems • Internal consistency

Strategic Management Principle
A company’s strategy ought to be grounded in its resources and in what it is good at doing (its competencies and competitive capabilities); it is perilous to craft a strategy whose success is dependent on resources and capabilities that a company lacks!

Strategic Management Principle
A company’s strategy can’t

produce real market success
unless it is well-matched to

industry and competitive
conditions!

Strategic Analysis
Industry analysis Customer/marketplace trends Environmental forecast Competitor Analysis Assessment of internal resources, capabilities

Strategy Mission
Fundamental purpose Values

Supporting Organizational Arrangements
Structure Process Symbols Rewards People Activities Functional policies and profiles

Objectives
Specific targets

The central integrated concept of how we will achieve our objectives.

Swiss Army Knives
• What external forces influenced Victorinox, the manufacturer of Swiss Army Knives? • How did the company respond to these forces? • What are some of Victorinox’s strengths? • Do you think Victorinox has a bright future given its strategy?

External Assessment

Agenda for External Assessment
• Forces in the general environments and their strategic implications • Determinants of industry profitability • Sources of competition in the industry environment • Strategic groups • Competitor appraisal • Industry segments

External Assessment Defined
External Assessment is the Gathering and Analysis of Information About Relevant Environmental Trends.

MACROENVIRONMENT The Economy at Large

Suppliers

Substitutes

Rival Firms

COMPANY

Buyer s

New Entrants
 IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

General/Macro Environment

Industry Environment

Segment, Strategic Group

Internal Environment Our Business

Why External Assessment?
External analysis allows firms to:
• discover threats and opportunities • see if above normal profits are likely in an industry • better understand the nature of competition in an industry • make more informed strategic choices

External Assessment
• The most difficult task to do yet the most significant factor affecting a company’s success or failure.
– Digital cameras to film – Computers and printers to typewriters – Singer

• Proactive nature of Strategic Management.

General Environment Components
Demographic Economic

Global

Industry Environment & Our Business

Political/ Legal

Technological

Sociocultural

Strategic Implication of MacroEnvironmental Forces
• The general environment affects entire industries. • The same environmental trend can have different effects on different industries. • The impact of an environmental trend often differs significantly for different firms within the same industry. • Spotting trends before competitors may lead to competitive advantage.

Strategic Implication of MacroEnvironmental Forces
• Factors in the general environment may overlap and influence one another. • To identify major trends factors comprising the general environment need to be systematically examined:
– What environmental factors are affecting industries in which we operate? In what direction? – Which of these are the most important in the present time? In the next few years? – What is their effect on our competitive position and performance?

Industry Analysis
• What determines the level of profits in an industry? • Potential Profits = Value - Cost. • Potential Profits are not equal to Actual profits. • Profits earned by firms in an industry are determined by:
1. the value of products/services to customers. 2. the existence and strength of competitive forces (Porter’s Model).

Industry Analysis
1. Who are our customers? What do they want? How do they choose between competing suppliers?

• The key to winning long-term customers is to understand their wants and needs and satisfy them better than competitors.
2. What are the forces driving competition? How intense is competition? How can a firm obtain superior competitive position?

Agenda
• Sources of competition in the industry environment • Key success factors of an industry • Strategic groups • Competitor appraisal • Industry segments • Competition at different stages of industry life cycle • Turn in info sheets and list of team members on Thurs (Mar 8)

Five Forces Model of Competition
Substitute Substitute Products Products
(from OTHER (of firms in industries) other industries)

Suppliers of Suppliers of Key Inputs Key Inputs

Rivalry Rivalry Among Among Competing Competing Sellers Sellers

Buyers Buyers

Potential Potential New New Entrants Entrants

What is Competition Like & How Strong Are the Competitive Forces?

Objective
• To identify
– –

Main sources of competitive forces Strength of these forces

• Key analytical tool

Five Forces Model of Competition

How to Do It
• Explain how each force acts to create competitive pressure—What are the factors that cause each force to be strong or weak? • Assess strength of each of the five competitive forces (Strong? Moderate? Weak? )
– – – – – Rivalry among competitors Competition from substitute products Competitive threat from potential entrants Bargaining power of suppliers Bargaining power of buyers

• Decide whether overall competition (the combined effect of all five competitive forces) is brutal, fierce, strong, normal/moderate, or weak

Competitive Force of Substitute Products
Concept
Substitutes matter when customers are attracted to the products/services of firms in OTHER INDUSTRIES—NOT from Other Competitors

Examples
 Coffee

vs. Tea vs. Coke  Sugar vs. Artificial Sweeteners  Plastic vs. Glass vs. Metal  Newspapers vs. TV vs. Internet

Porter’s Five Forces Model
Threat of Substitutes
• substitutes fill the same need but in a different way
- Coke and Pepsi are rivals, milk is a substitute for both • substitutes create a price ceiling because consumers switch to the substitute if prices rise • substitutes will likely come from outside the industry—be sure to look

Competitive Force of Substitute Products
• Are there substitutes for the product/service? • How willing are the customers to shift their purchases on the basis of changes in price?

Principle of Competitive Markets
The competitive threat of substitutes is stronger when they are:
– – – –

Readily available
Attractively priced Believed to have comparable or better performance features Customer switching costs are low

Porter’s Five Forces Model
Threat of Entry
• if firms can easily enter the industry, any above normal profits will be bid away quickly • barriers to entry lower the threat of entry • barriers to entry make an industry more attractive

Competitive Force of Potential Entry
• Barriers exist when
– –

Newcomers confront obstacles Economic factors put potential entrant at a disadvantage relative to incumbent firms

• Effectiveness of entry barriers depends on the resources and strategies of new entrants.

Common Barriers to Entry
• Capital requirements and/or other specialized resource requirements • Economies of scale • Cost disadvantages independent of size – Existence of learning/experience curve effects – Access to raw materials • Strong brand preferences and customer loyalty • Access to distribution channels • Regulatory policies, tariffs, trade restrictions • Retaliation • Effectiveness of entry barriers depends on the resources and strategies of new entrants.

Principle of Competitive Markets
Threat of entry is stronger when:
 Entry

barriers are low

 Incumbents  Newcomer

are unwilling or unable to contest a newcomer’s entry efforts can expect to earn attractive profits

Porter’s Five Forces Model
Threat of Rivalry
• high rivalry means firms compete vigorously—and compete away above average profits Industry conditions that facilitate rivalry: • large numbers of competitors • slow or declining growth • high fixed costs • low product differentiation

Porter’s Five Forces Model
Threat of Buyers
• powerful buyers can lower profitability of an industry by demanding lower prices and/or higher levels of quality and service Industry conditions that facilitate buyer power: • small number of buyers • lack of a differentiated product

• the product is significant to the buyer
the importance of the product to the quality of the buyer’s product importance of the item as a proportion of total cost

Porter’s Five Forces Model
Threat of Buyers
Industry conditions that facilitate buyer power:
• buyers operate in a competitive market—they are not earning above normal profits • buyers can vertically integrate

Porter’s Five Forces Model
Threat of Suppliers
• powerful suppliers can lower profits

Industry conditions that facilitate supplier power: • small number of firms in supplier’s industry
• highly differentiated product • lack of close substitutes for suppliers’ products • supplier could integrate forward • industry is an insignificant customer of supplier

Industry Attractiveness Corporate Which industries should we Strategy be in?
External Environment Analysis: •Trends in the Macro-environment •Industry Analysis

Positioning How Should we compete?

Competitive Strategy

General Prerequisites for Success

Supplying a product/service which customers are willing to pay a price that exceeds the cost of production.

The ability to survive competition

Analysis of Customers & Demand

Analysis of Competition

Key Success Factors

Key Success Factors
• Key Success Factors (KSFs): Specific performance dimensions that a firm must achieve to attract customers and to survive competition.
– Sources of competitive advantage – Basis for business-level strategies

Identifying Industry Key Success Factors
• Answers to two questions pinpoint KSFs
– On what basis do customers choose between competing brands of sellers? – How can a firm survive competition in this industry?

• KSFs consist of a few really major determinants of financial and competitive success in an industry

What are the Key Factors for Competitive Success?
• Competitive elements most affecting every industry member’s ability to prosper
– Specific strategy elements – Product attributes – Resources – Capabilities

• KSFs spell the difference between
– Profit and loss
– Competitive success or failure

Common Types of Key Success Factors
Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities Manufacturing- Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Lowrelated cost product design; Flexibility to make a range of products Strong network of wholesale distributors/dealers; Gaining ample Distributionspace on retailer shelves; Having company-owned retail outlets; Low related distribution costs; Fast delivery Fast, accurate technical assistance; Courteous customer service; MarketingAccurate filling of orders; Breadth of product line; Merchandising related skills; Attractive styling; Customer guarantees; Clever advertising Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop Skills-related innovative products; Ability to get new products to market quickly Organizational Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct capability business; More experience & managerial know-how Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Other types Patent protection

Technologyrelated

Example: KSFs for Beer Industry
• Utilization of brewing capacity -- to keep manufacturing costs low

• Strong network of wholesale distributors - to gain access to retail outlets
• Clever advertising -- to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry
• Fashion design -- to create buyer appeal • Low-cost manufacturing efficiency -- to keep selling prices competitive

Dunkin Donuts
• Evaluate the strength of each one of the 5 forces • Evaluate the overall attractiveness of this industry • Identify KSFs

Competitor Analysis
 Knowing one’s competitors critical to effective strategic management.  What does a firm need to know about its competitors?
 Who are our competitors?  What are their strategies?  What are their objectives?  What are their assumptions? – What are their resources and capabilities?

Who are Our Closest Competitors?
• One technique for revealing the different competitive positions of industry rivals is strategic group mapping • A strategic group consists of those rivals with similar competitive approaches in an industry

Strategic Group Mapping
• Firms in the same strategic group have two or more competitive characteristics in common – Sell in same price/quality range – Cover same geographic areas – Be vertically integrated to same degree – Have comparable product line breadth – Emphasize same types of distribution channels – Offer buyers similar services – Use identical technological approaches

Procedure for Constructing a Strategic Group Map
STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another – distribution channels – product quality – degree of vertical integration – technology – price levels – level of advertising – product-market scope – level of customer service

Procedure for Constructing a Strategic Group Map
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Example: Strategic Group Map of the Video Game Industry
Types of Video Game Suppliers/Distribution Channels
Video Arcades, CoinOperated Machines Arcade operators Publishers of games on CD-ROMs

Home PCs Video game consoles Online Video game sites Low (Coin-operated equipment)

Sony, Sega, Nintendo, several others

MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN

Medium (Video players cost $100-$300)

High (Use PC)

Overall Cost to Players of Video Games

Guidelines: Strategic Group Maps
• Variables selected as axes should not be highly correlated • Variables chosen as axes should expose big differences in how rivals compete • Variables do not have to be either quantitative or continuous • Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group • If more than two good competitive variables can be used, several maps can be drawn

Competitor Analysis
• Competitor’s current strategy • Competitor’s objectives • Competitor’s assumptions about the industry • Competitor’s resources and capabilities

WHAT ARE THEIR STRATEGIES?
• • • • • • • Annual reports Public speeches of top management Websites What investments did they undertake recently? What hiring is taking place? What new products are they developing? What mergers/acquisitions/etc have they undertaken recently? • What advertising campaigns have they planned?

WHAT ARE THEIR OBJECTIVES?
 Short-term financial goals versus long-term market share goals?  Other objectives: technological leadership, quality leadership, cost leadership, etc.?  Is the competitor owned by a parent firm?  Run for growth or milked?  How much autonomy the subsidiary has?  Are they satisfied with their current performance level?

Categorizing Objectives and Strategies of Competitors
Competitive Scope • Local Strategic Intent • Be dominant leader • Overtake industry leader • Be among industry leaders • Move into top 10 • Move up a notch in rankings • Maintain current position • Just survive Market Share Objective • Aggressive expansion via acquisition & internal growth • Expansion via internal growth Competitive Position • Getting stronger; on the move • Wellentrenched • Stuck in the middle of the pack Strategic Posture • Mostly offensive • Mostly defensive • Combination of offensive & defensive • Aggressive risk-taker • Conservative follower Competitive Strategy • Striving for low-cost leadership • Focusing on market niche • Pursuing
differentiation

• Regional

• National

• Multicountry

• Expansion via acquisition
• Hold on to present share

• Going after a different position
• Struggling; losing ground

• Global

• Give up present share to achieve short-term profits

• Retrenching to a position that can be defended

based on Quality Service Technology superiority Breadth of product line Image & reputation More value for the money Other attributes

Resources, Capabilities, & Assumptions
     • financial reserves capital equipment work force brand loyalty management skills assumptions

Segmentation Analysis
• Industries are heterogeneous • The nature and intensity of competition, as well as needs of customers and KSFs vary within industries. • Assess the attractiveness of different segments in terms of profits.
– New entrants – Existing firms

Steps in Segmentation Analysis
1. Identify key segmentation variables:
– Industries are segmented by applying variables that subdivide the market into discrete categories. – First, identify the most appropriate variables to use. – Segmentation variables are either the characteristics of customers or the characteristics of the product.

Examples to Segmentation Variables
• Type of Customers:
– Industrial Customers – Consumers – Government

• Industrial Customers:
– – – – Size Geographic Location Industry Technology

• Consumers
– Demographic characteristics – Psychographic characteristics

Examples to Segmentation Variables
• Consumers – Benefits – User rate

• Products
– Physical size – Price level – Features – Technology/design – Performance

Steps in Segmentation Analysis
2. Constructing a Segmentation Matrix • Useful in identifying unexploited opportunities in an industry. • Word of Caution:
– Assess demand before moving in.

Steps in Segmentation Analysis
3. Analyze Segment Attractiveness: • Use the Five Forces Model. • Two differences:
– competition from substitutes.
• Ex. Station wagons - minivans

– threat of new entrants
• barriers to mobility protect a segment from invasion of firms from other segments.

4. Identify Segment’s KSFs 5. Analyze Advantages of Broad Vs. Narrow Segment Scope

Exploiting Industry Structure Opportunities
Generic Industry Structures
• at any point in time, the structure of most industries fits into one of four generic categories • each industry structure presents opportunities that may be exploited
• • • • Fragmented Industry Structure Emerging Industry Structure Mature Industry Structure Declining Industry Structure

Exploiting Industry Structure Opportunities
Emerging Industry Structure
Industry Characteristics • new industry based on break through technology or product • no product standard has been reached Opportunity • first mover advantages • technology • locking-up assets

• no dominant firm has emerged
• new customers come from nonconsumption not from competitors

• creating switching costs

Exploiting Industry Structure Opportunities
Mature Industry Structure
Industry Characteristics • slowing growth in demand • technology standard exists • increasing international competition • industry-wide profits declining Opportunities • refine current products

• improve service
• process innovation

• industry exit is beginning

Competing for the Future
• What characteristics of emergent industries were depicted in the VCR industry? • How did JVC attain a position of advantage? • What first-mover advantages did JVC secure? • What characteristics of mature industries were depicted in the Swiss watch industry? • What did SWATCH do attain an advantageous position?

Exploiting Industry Structure Opportunities
Fragmented Industry Structure
Industry Characteristics Opportunity Consolidation • buy competitors • build market power

• large number of small firms
• no dominant firms

• no dominant technology
• commodity type products • low barriers to entry • few, if any, economies of scale

• exploit economies of scale

Exploiting Industry Structure Opportunities
Declining Industry Structure
Industry Characteristics • industry sales have sustained pattern of decline • some well-established firms have exited • firms have stopped investing in maintenance Opportunities

• market leadership
• niche • harvest

• divest

Agenda
• Distinguish between resources and capabilities • Define distinctive capabilities • Discuss role of resources and capabilities in strategy formulation • Identify the profit earning potential of resources and capabilities

Internal Assessment
• Managers should not only focus on the external environment but also on the resources and capabilities of the firm. • Objectives
– Achieving strategic fit between the firm’s resources and capabilities and its strategy – Ensuring that the firm’s resources are fully exploited – Building the firm’s resource base

Resources of the Firm
1. Individual resources of the firm. E.g. equipment, skills of individual employees, brand names, etc. • Tangible Resources • Intangible Resources • Human Resources 2. Capabilities: Combinations of resources.

Tangible Resources
• Financial Resources: > Main features: firm’s borrowing capacity and internal funds generation. > Key indicators: debt/equity ratio, credit rating • Physical assets: > main features: size, location, technical sophistication, flexibility of plant, equipment, reserves of raw materials. > key indicators: resale values, year of manufacturing, alternative uses.

Evaluating Firm’s Financial Resources
• • • • • • • Economic Value Added Profitability Ratios Liquidity Ratios Leverage Ratios Activity Ratios Cost of Capital Ability to raise additional capital

Examples of Tangible Assets
• A manufacturing firm’s property and equipment • A telephone company’s network of wire, cable, and satellites • An entertainment company’s library of old movies • A direct marketing firm’s mailing list • A natural resources company’s landholdings • A motel chain’s computerized reservation system • A parts store’s inventory

Gerber Products Co.
• Few firms can boast the kind of brand recognition, loyalty, and supermarket shelf space enjoyed by one company in particular, one that made its name as a purveyor of much sought-after foods like strained peas and pureed squash. When it comes time to feed their own children, generations of American parents, themselves raised on Gerber baby food, wouldn’t buy anything else. The firm has a 75-year history and commands more that 70% of the U.S. baby food market. Gerber’s competitors have tried to imitate for decades with little success. Displacing the comfort and security that adults experience when buying Gerber has indeed proven difficult. In 1994, Gerber was acquired by the Swiss pharmaceutical firm Sandoz. At the time the net worth of Gerber’s assets, including its plants and inventory, was less than $300 million. However, Sandoz paid $3.7 billion for Gerber–almost 33 times its annual profits

Intangible Resources
• Reputation: > main features: brands, relationships w/ customers, suppliers, and others, reputation of reliability, quality, being socially responsible > key indicators: brand recognition, premium price, scope of reputation. • Technological resources: > main features: stock of technology including proprietary tech (patents, copyrights, trade secrets). > key indicators: number of patents, revenue form patent licenses, R&D staff as a percentage of total employment.

Examples of Intangible Assets
• A research and development firm’s patents • A restaurant’s secret recipe • A well known and trusted brand name • A firm’s good reputation • A unifying corporate culture • A high level of community support • A multinational corporation’s experience with various national governments

Human Resources
• Main Characteristics: training, expertise, skills, adaptability, motivation, commitment, loyalty, communicative and interactive abilities of employees. • Key Indicators: educational, technical, and professional qualifications, wages and salaries.

Examples to Human Resources
• A knowledgeable and creative workforce • A management team with good working relationships across functions • A visionary leader with strong motivation and communication skills.

Organizational Capabilities
• Capability: A firm’s capacity to perform a particular activity. • Managers should concentrate on the capabilities that the firm does particularly well relative to its competitors. • Distinctive Capabilities / Competencies: Those activities that a firm does particularly well relative to competitors.

Example
• Coca-Cola has a widely recognized logo and a distinctive red can with a trademarked white wave image that goes around the can. Coca-Cola also has well established set of reporting structures, reward systems, communications systems, and IT systems. These are intangible resources. Coca-Cola has access to substantial working capital (cash). This is a financial (tangible) resource. Coca-Cola has talented marketing professionals. These are individual human resources. Coca-Cola has the ability to put these various resources together in an effective marketing campaign. This is a capability.

Examples: Distinctive Capabilities
• Sharp Corporation
– Expertise in flat-panel display technology

• Toyota, Honda, Nissan
– Low-cost, high-quality manufacturing capability and short design-to-market cycles

• Intel
– Ability to design and manufacture ever more powerful microprocessors for PCs

• Motorola
– Defect-free manufacture (six-sigma quality) of cell phones

Strategic Management Principle
A distinctive capability empowers a company to build competitive

advantage!

How to identify capabilities?
• Internal Audit (Functional Approach) classifies the capabilities with respect to the functional areas they pertain to. • Value-Chain Analysis divides the business into a set of linked activities that may each produce value for the customer.

Internal Audit
• Every firm has certain functions that it must perform. • Some common functions:
– production/operations – marketing – R&D – financial management/accounting – HR management – general management – IS

Internal Audit
• Involves a thorough assessment of each one of the functional areas.
– Diagnostic questions

• Results in identification of capabilities that the firm has developed in each area. • Advantage:
– Very flexible.

Internal Audit Questions
• Production/Operations
– Does the firm have effective inventory control policies and procedures? – Does the firm utilize quality control procedures? Are they effective? – How does the firm do on on quality assessments? – Does the production/operations procedures work smoothly and with little disruptions? – Have production/operations goals been established, and are work activities aimed at achieving these goals?

• R&D
– – – – Are the firm’s products technologically competitive? Is communication between R&D and other units effective? Is development time form concept to actual product appropriate? How many products have been developed during the last year?

• Financial/Accounting
– Are the firm’s capital budgeting procedures effective? – Has the firm established financial goals? Are they appropriate?

• Marketing
– – – – – – – –

Internal Audit Questions

Does the firm segment markets effectively? What is the firm’s market position? How is product quality, and how does it compare to competitors? Is customer service effective, and how does it compare to competitors? Is advertising strategy effective? Are customer complaints handled effectively and efficiently? Are present channels of distribution reliable and cost effective Are marketing planning and budgeting effective?

• HR Management
– Does the firm attract appropriate job applicants? – Are employee selection procedures effective? – Are organizational compensation and reward programs appropriate?

• IS
– Is information distributed effectively and efficiently? Is is it updated regularly? – Is IS used by employees in making decisions?

The Value Chain Analysis
• The firm can be divided into a number of linked activities that each produces value for the customer. • Focus: Creating customer value.
– An activity can help the firm differentiate its product. – An activity can help the firm lower its costs.

• All activities of a firm can be categorized into:
– Primary Activities – Support Activities

Typical Company Value Chain
Primary Activities and Costs
Purchased Supplies and Inbound Logistics

Operations

Distribution And Outbound Logistics

Sales and Marketing

Service

Profit Margin

Product R&D, Technology, Systems Development

Human Resources Management
General Administration

Support Activities and Costs

The Value Chain Analysis
• Primary Activities:
– Inbound logistics: Warehousing, materials handling, inventory control. – Operations: Machining, assembly, molding, testing. – Outbound logistics: Finished goods warehousing, order processing, transportation. – Marketing and sales: Advertising, distribution of catalogs, direct sales, distribution channeling, promotion, pricing. – Service: Repairing, supplying parts, installation.

The Value Chain Analysis
• Support Activities:
– Procurement: Actual purchase of inputs. – Technology Development: Learning processes that results in the improvements in the way organization functions. – HR Management: Recruiting, hiring, training, compensation. – Firm Infrastructure: Planning and accounting

Questions for Value Chain Analysis
• Inbound Logistics
– Is there a materials control system? How well does it work? – What type of inventory control system is there? How well does it work? – How efficiently are raw materials handled and warehoused?

• Operations
– How productive is the equipment compared to competitors? – Are production control systems in place? How efficient and effective are they? – Is the firm using appropriate level of automation?

• Outbound Logistics
– Are finished products delivered in a timely fashion to customers? – Are they delivered efficiently? – Are they warehoused efficiently?

Questions for Value Chain Analysis
• Marketing and Sales
– – – – – Is marketing research effectively used to identify customer segments? Are sales and promotion innovative? Have alternative channels of distribution been evaluated? Does the firm present an image of quality? How brand loyal are the customers?

• Customer Service
– How promptly and effectively are customer complaints handled? – Are our product warranty and guarantee policies appropriate? – How well does the firm provide replacement parts and repair services?

• Procurement
– Has the firm developed alternative sources for obtaining the resources? – Are resources procured in a timely fashion? At lowest possible cost? At acceptable quality levels? – Has the firm established sound long-term relationships with suppliers?

Questions for Value Chain Analysis
• Technology Development
– Is the relationship between R&D employees and other departments storng? – Have the technology developments been able to meet the critical deadlines? – How successful have R&D activities been in product and process innovations?

• HR Management
– How effective are the firm’s procedures for recruiting, selecting, and training? – Are there appropriate promotion policies in place, are they used effectively? – How appropriate are reward systems?

• Firm Infrastructure
– Does the strategic planning system facilitate and enhance the accomplishment of goals? – Can we obtain low cost funds? – Does IS provide timely and accurate information?

Resources, Capabilities, and Profits
• Relevant: Is the resource valuable? • Scarce: Is the resource widely available? • Durability: How quickly is the advantage depreciated? • Mobility: Can the resource be bought and sold or transferred? • Imitability: Is it hard to copy? • Substitutability: Are there viable alternatives

Resources, Capabilities, & Profits
• • • • • • relevant scarce durability mobility imitability substitutability
Profit potential

Sustainability of profits

Resources
Inputs to a firm’s production process

Sustainable Competitive Advantage
YES

Cost Leadership OR Differentiation

Capability
Integration of a team of resources

Passes 6 criteria test
NO

Business-Level Corporate-Level Strategies

BETTER than competitors?

YES

A Non-Strategic capability/resource

Business Strategy & Competitive Advantage

Agenda
• Define key terms
– Business strategy – Competitive advantage – Competitive scope

• Discuss Porter’s generic strategies • View and discuss ―M. Porter on Competitive Strategy‖ video series • Discuss Best-Cost Strategy

What is competitive/business strategy?
• Two sources of profits:  Locating in an industry where favorable industry conditions result in the industry earning a rate of return above the competitive level. – Corporate strategy - where the firm competes.  Attaining a position of advantage vis-à-vis its competitors within an industry that allows the firm to earn profits above the industry average. • Competitive strategy - how the firm competes within an industry. • Competitive advantage • Competitive scope

Competitive Advantage & Competitive Scope
 Competitive Advantage: The outperform rivals on profitability.
 Cost advantage  Differentiation advantage

ability

to

 Competitive Scope: The breadth of target within which the firm seeks to gain a competitive advantage.
 Broad scope  Narrow scope

The Generic Competitive Strategies
Type of Advantage Sought
Lower Cost Differentiation

Market Target

Broad Range of Buyers

Broad CostLeadership Strategy Best-Cost Provider Strategy

Broad Differentiation Strategy

Narrow Buyer Segment or Niche

Focused Cost Strategy

Focused Differentiation Strategy

Ivory Soap
• Introduced as a differentiated product • In 1950s positioned as the cost leader • What are the requirements to pursue differentiation advantage? • What are the requirements for cost leadership? • How did Ivory develop a significant cost gap over its rivals?

La Quinta Inns
• What are the requirements to be a successful focuser? • How did La Quinta develop a significant cost gap over its rivals? • What are the requirements for cost leadership? • Pay attention to ―Lessons‖

Generic Strategies
Cost-Leadership / Low-Cost Strategy
A generic business strategy in which a business produces, at the lowest cost possible, no-frills products and services industry-wide for a large market

Cost

Ivory Today
Differentiation

Generic Strategies

Cost

Focus-Low Cost Strategy
Emphasizes keeping costs low while serving a narrow segment of the market

La Quinta

Differentiation

Cost Leadership
• Unique position • What does it take to be the cost leader? • Good product • standard but acceptable quality • appeals to large percentage of the market (broad cost leadership) • Opening up significant and sustainable cost difference • Command prices at or close to industry average

Securing a Cost Advantage
Approach 1 Do a better job than rivals of controlling the Cost Drivers
Control costs! By-pass costs!

Approach 2
Redesign value chain to bypass some cost-producing activities

Approach 1: Controlling the Cost Drivers
• Capture scale economies • Capture learning and experience curve effects

• Manage costs of key resource inputs
• Find sharing opportunities with other business units • Compare vertical integration vs. outsourcing • Assess first-mover advantages vs. disadvantages • Control percentage of capacity utilization

• Make wise strategic choices related to operations
E.g. Product features, Mix & variety of products, Service levels, Wage levels

Approach 2: Redesigning the Value Chain
• Abandon traditional business methods and shift to e-business technologies and use of Internet • Use direct-to-end-user sales/marketing methods • Simplify product design • Focus on a limited product/service • Find ways to bypass use of high-cost raw materials • Relocate facilities closer to suppliers or customers • Shift to a simpler, less capital-intensive, or more flexible technological process

Other requirements for CostLeadership
• Access to capital • Process engineering skills • Close supervision, detailed job specifications, high formalization • Compensation and rewards based on quantitative targets • Strengths in manufacturing, distribution, technology, and managerial control.

Low-Cost Characteristics
• • •

Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs


Programs promoting continuous cost improvement Investments in cost-saving improvements

Risks of Low-Cost Strategy
• Preoccupation with cost reduction can cause the firm to miss required product or marketing changes. • Technological breakthroughs can eliminate cost advantages of the cost leader.

Effective Cost Leaders can MITIGATE the Five Forces to remain profitable
Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases More likely to make very large purchases which reduces chance of supplier power

Threat of New Entrants

Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive Take time to move down the “Learning Curve”

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers
Can mitigate Buyer Power by:

Well positioned relative to Substitutes in order to: Lower prices to maintain value position

Threat of Substitute Products

Driving prices far below competitors’ which may cause exit and shift power back to the firm

Effective Cost Leaders can also succeed IN SPITE of unattractive Five Forces
Powerful Suppliers can: Raise their Prices Lower their Quality LCL can absorb these COST increases better than others as long as the source of their cost advantage is not based on inputs.

Threat of New Entrants

New Entrants cannot make a profit compared to Low Cost Leader

Bargaining Power of Suppliers
Substitutes Place a Price Ceiling on the Industry. LCL can profit better than others even as this ceiling is lowered due to more plentiful substitutes.

Rivals
Can’t absorb costs of price wars or marketing blitzes as well as the LCL.

Bargaining Power of Buyers
Powerful Buyers can: Demand Lower Prices Demand Higher Quality
LCL and absorb these COST Increases better than others.

Threat of Substitute Products

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