Business Strategy and Competitive Advantage

Business Strategy

• A plan to achieve competitive advantage through four interrelated strategic choices.
• These include:
  • Selecting markets to compete in.
  • Defining the unique value the firm will offer.
  • Identifying resources and capabilities needed to deliver that unique value.
  • Establishing methods to sustain the advantage and prevent imitation.
• Successful strategies consider market attractiveness, unique value proposition, necessary resources, and sustainability of competitive edge.

Competitive Advantage

• Achieved when a firm consistently generates higher profits compared to its competitors.
• This involves carefully considering markets, unique value, required resources, and sustainability.
• The strategic management process is how firms plan and allocate resources to gain a competitive advantage.
• External analysis examines industry attractiveness, opportunities, and threats.
• Internal analysis assesses a firm's resources, capabilities, strengths, and weaknesses.

Strategies for Offering Unique Value

• Cost Advantage: Producing a product or service at a lower cost than competitors.
• Differentiation Advantage: Making a product more attractive through unique features, reliability, or convenience.

Information and Analysis for Strategy Formulation

• Mission: A company's primary purpose, defining the business and customers it intends to serve.
• SWOT Analysis: A strategic planning method evaluating strengths, weaknesses, opportunities, and threats.
• External analysis includes competition and customer analysis.
• Internal analysis focuses on the company’s resources and capabilities.

Strategy Formulation

• Corporate Strategy: Decisions about which markets to compete in, made at the executive level.
• Business Unit Strategy: Decisions on how to gain and sustain advantage, made at the business unit level.
• Functional Strategy: Decisions on how to effectively implement the business unit strategy within functional areas.
• Strategy Vehicles: Activities and strategic choices influencing a firm's ability to enter markets and deliver unique value.

Strategy Implementation

• Translating a chosen strategy into organizational action to achieve strategic goals.
• Requires alignment of functional strategies and organizational structure.
• Successful implementation includes well-aligned functional strategies, and a supportive organizational structure, systems, staff, skills, style (culture), and shared values.

Responsibility and Benefits of Business Strategy

• Strategic Leaders: Responsible for formulating and implementing strategies for organizational success.
• Deliberate Strategy: A plan formulated through a deliberate planning process.
• Emergent Strategy: A plan that develops over time, despite initial goals.
• Stakeholders: Those with a vested interest in an organization's activities and performance.
• Include capital market, product market, organizational, and community stakeholders.
• Shareholders: Owners of the company.

Tesla's Strategy

• Enter the high-end market and drive down to higher volume, lower price models.
• Utilizes a direct-to-consumer sales model.
• Cash from preorders funds research and development projects.
• Autopilot System leads to autonomous driving.
• Tesla focuses on batteries and solar energy, competing in the energy and home construction industries.

Competitive Advantage and Strategic Management

• Strategies must be dynamic to adapt to changing markets, customers, and technologies.
• Competitive advantage occurs when a firm consistently generates above-average profits.
• Above-average profits exceed investor expectations for similar-risk investments.
• Risk involves uncertainty about potential investment profits or losses.
• Organizations may prioritize objectives other than profit, using metrics like degrees granted or patient satisfaction.
• Return on assets (ROA) and return on equity (ROE) compare firms' operational efficiency.
• Effective strategic management helps identify opportunities and formulate strategies for competitive advantage

Unique Value and Sustaining Advantage

• Companies offer unique value through low cost or differentiation.
• Combining both can be a powerful source of competitive advantage.
• Strategists must build or acquire resources and capabilities to deliver unique value.
• Resources are assets accumulated over time (e.g., plants, brands, patents).
• Capabilities are processes coordinating human activity to achieve specific goals.
• Implementation plans align organizational structure, staffing, skills, and values with the strategy.
• Sustaining advantage involves creating barriers to imitation.
• Example: iTunes was designed restrictively to maintain market share.

Guiding Strategy Formulation

• Mission statements often define core values and inspire employee behavior.
• External analysis is critical for determining where to compete through industry and customer analysis.
• Understanding competition and customer needs is essential for strategy development.
• Internal analysis involves analyzing resources and capabilities to deliver unique value.

External Analysis and Apple's Mission

• Industry analysis helps determine markets to compete in.
• Understanding five forces shapes industry competition and profitability.
• Apple initially focused on user-friendly computers, later expanding into music with the iPod.
• Compaq missed the MP3 player opportunity by sticking to its computer mission.
• Apple realized the potential in legal digital downloads, broadening mission to include music and devices, renaming to Apple Inc.

Customer and Internal Analysis

• Price sensitivity affects consumers' willingness to purchase.
• Segmentation analysis divides customers into groups with similar needs.
• External analysis reveals competitive forces, opportunities, threats, and customer preferences.
• Internal analysis focuses on resources and capabilities within the company.
• The resource-based view determines available strategic resources.
• Firms must improve or create resources and capabilities to offer unique value.
• Companies allocate resources to align them with chosen strategies.

Strategy Vehicles and Implementation

• Diversification, acquisition, and strategic alliances are strategy vehicles.
• Vertical integration involves "making" rather than "buying" services.
• International expansion achieves economies of scale and access to resources.
• Strategy implementation aligns functional strategies with unique value.
• Successful implementation depends on a company’s structure, systems, staff, skills, style, and shared values.

Walmart's Functional Strategies

• Walmart's HR strategy keeps labor costs low with low wages and minimal management layers.
• IT and operations focus on cost reduction
• The purchasing department aggressively negotiates with suppliers.
• The marketing department ensures prices are always as low as or lower than competitors.

Ethics and Stakeholder Benefit

• Ethical challenges facing the strategy includes delivering unique value to customers.
• Leaders balance customer and shareholder demands, sometimes neglecting employee and community needs.
• Good business strategy benefits stakeholders including shareholders.
• Strategy must adhere to ethical business standards.
• Above-average returns meet shareholder expectations and satisfy other stakeholders.
• Stakeholder needs must therefore be considered in strategic decisions.

Analysis of the External Environment

• Deciding where to compete is the first strategic question.
• Defining industries and target markets is very important to get right.
• If managers misunderstand industries, may be vulnerable to unseen competitors.

Five Forces Analysis: Steps

• Identify specific factors relevant to each force.
• Analyze the strength of each force.
• Estimate the overall strength of the combined forces.

Five Forces Analysis: Forces

• Buyer Power
• Supplier Power
• Threat of New Entrants
• Threat of Substitute Products
• Rivalry

Rivalry

• Competition among firms within an industry.
• Factors include:
  • Number and size of competitors.
  • Standardization of products.
  • Switching costs for buyers.
  • Growth in demand.
  • Unused production capacity.
  • Fixed costs and perishable products.
  • Difficulty for firms of leaving the industry.

Buyer Power

• Bargaining Power: Influenced by number/size of buyers.
  • Also affected by credible threat of backward integration.
• Price Sensitivity: Impacted by financial struggles, proportion of buyer costs.
  • Also affected by volume, performance impact, and potential savings for buyers.

Supplier Power

• Determined by fewer suppliers but lots of buyers.
• The Credible threat of forward integration plays a key role.

Threat of New Entrants

• Impacts: Creates greater rivalry.
• Existing firms try to discourage new entrants by building barriers to entry
• Depends on barriers to entry through:
  • Economies of scale.
  • Cost advantages.
  • Capital requirements.
  • Government policies etc...

Threat of Substitute Products

• Awareness and Availability: Increases when substitutes are well known.
• Price and Performance: Threat increases if substitutes are cheaper and perform similarly.

Industry Attractiveness

• Depends on how much influence and power firms have made

General Environment

• Affects strategy: Include complementary products and services. Also looks at technological change, economic conditions.

General Economic Conditions

• Economic growth.
• Interest rates.
• Inflation.
• Demographic Forces: Impacted by population changes.

Chapter 2 Reading - External Environment

• State Farm adjusted to changing rideshare industry.
• External environment provides opportunities and threats.
• Five forces define industry structure and shape competitive interactions.
• A firm’s industry determines customers and competitors.
• A thorough understanding of industry often begins by taking an customer-oriented view

NAICS

• One tool to help define industries.
• Can be also for helping to determine who the primary competitors and stakeholders are, although in fast-changing industries, the NAICS can sometimes lag behind changing technologies or changing customer demands
• Vary with industries, such as rivalry

Factors for the Intensity of Rivalry

• The number and size of competitors
• Standardization of products
• Costs to buyers of switching to another product
• Growth in demand for products
• Levels of unused production capacity
• High fixed costs and highly perishable products
• The difficulty for firms of leaving the industry

Number and Size of Competitors

• More competitors, more rivalry.

Switching Costs

• Fundamental part of 5 forces.

High Exit Barriers

• labor or government agreements that make it difficult to close a plant

Number, or Concentration, and Size of Suppliers

• Larger the number of sellers compared to the buyers, the less likely buyers are to pay the price that sellers are demanding.

Forward Integration

• Buyers less likely to pay prices.

Government Policy Restrictions

• Policy may increase difficulty to enter market

Factors that determine a Threat

• the awareness and availability of substitutes and their price and performance compared to an industry’s products

Factors of General Environment

• Complementary produces or services.
• Technological Change
• Relative importance differs

Cutting-Edge Technology Innovations at Disney

• Technicolor
• A multiplane camera enhanced the illusion-of-life artistry
• Precursor to surround sound technology.
• The country’s first destination theme park

The Value Chain

• A way to describe firm differences that contribute to overall strategy
• the steps required to turn raw materials into finished products and/or service
• also describes the key functions of the firm linked to each stage and functions that span the productive activities of the firm
• A visual description of the steps required to turn raw materials into finished products and/or services. Also describes key functions of the firm linked to each stage and functions that span the productive activities of the firm

Resource-Based View

• Organizational processes, firm attributes, information, knowledge controlled by a firm such as strategies that improve efficiency and effectiveness
• The procedures, processes, and routines firms employ in their activities
• A firm’s values and rankings of what is most important
• Tangible or intangible resources or factors of production that create economic value for the firm that it controls

Tangible and Intangible Resources

• Tangible resources like land, factories, machinery, equipment, or cash
• Intangible resources brands, licenses patents, knowledge, and reputation
• Categories of resources are: physical, Financial, Human, Intangible resources

Capabilities

• Represent the “how” of competitive advantage.
• Procedures, processes, or routines for delivering value
• Designed to continuously expand existing resources or to improve or modify operating capabilities

Priorities and Values

• Drive resource allocation processes such as capital investment, human capital acquisition and training, and brand development
• Maintain allocations over time when things get tough

VRIO Model of Sustainability

• Worth or utility
• To be uncommon
• Attribute of a resources that describes the degree of difficulty a competitor would face in copying, imitating or mimicking the value of that resource
• Degree to which the legal, administrative, and operating structure of the firm allows it to capture the rents generated by resources

Assessing Competitive Advantage with VRIO

• When firms that can’t create value for their stakeholders don’t survive
• When a company survives but has no real competitive advantage over rivals
• When firms combine the legal elements, intellectual property rights, administrative elements, and cultural elements

Gathering Data for Competitive Advantage

• written or numeric information found in the library or on the Internet
• ranging from personal questions to impersonal surveys
• such as visits or use of products or services

Mickey’s Arrival to Disney

• set off events that continued to drive profits almost 100 years later.

How the Value Chain Helps Managers

• Helps identify areas in which a firm has an absolute strength but provides no guidance about strength relative to competitors
• Can help firms modify and evolve processes to keep pace with environmental changes

VRIO and Disney

• Disney’s rich capabilities for innovation in both technical design and storytelling
• The process through which a resource or capability came into being may make it difficult for competitors to imitate. Helps to block imitation when resources or capabilities follow a sequential development path
• Skills are difficult and impossible to coach because they are based on tacit knowledge

Organized Exploitation

• May employ valuable, rare, difficult-to-imitate resources and systems in place

Generic Strategies

• Companies typically choose between one of two “generic” strategies for offering unique value to customers: - Cost Advantage : Reduce its prices below all of its competitors - Differentiation Advantage

Economies of Scale and Scope

• A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases
• Arise from four principal sources: ability to spread fixed costs of production.

Specialization Evaluation

• Graphic representation of the relationship between cost per unit and scale (volume) of production in a given time period
• Smallest level of output that a plant or firm can produce to minimize its long run average costs (where costs per unit flatten)
• an increase in marginal cost when output is increased

Economies of Scope

the average total cost of production decreases as a result of increasing the number of different goods produced

• They exist when the cost of conducting two business activities within the same company is less than the cost of those same two businesses operated separately

Cost Advantage

• Strategy in which the unique value offered is lower-priced products or services
• The concept that labor costs per unit decrease with increases in volume due to learning ( can be acquired initially, but becomes much slower to learn initially)

Strategic Use of Curves

• Firms in an industry must grow as fast as or faster than their rivals
• the company may want to price its product or service aggressively low to gain market share
• assess a company’s relative cost position
• predict cost synergies by combining their volume/scale

Proprietary Knowledge

• Information that is not public and that is viewed as the property of the holder
• Able to achieve a cost advantage due to this because its independent of scale or output (e.g. Toyota Production System)

Lower Input Costs

• achieve cost through lower cost inputs using - Four primary ways - Bargaining power over suppliers - purchasing volume - Purchasing and negotiating tactics - cooperation with suppliers

Business Model and Value Chain

• The plan and set of activities used by a company to generate revenue and make a profit from operations
• Performing completely new activities

Cost and Location Advantages

• Can vary because of differences in wage rates, exchange rates, or raw material or energy costs

Chapter 5 Differentiation

• Four primary ways companies differentiate their products from competitors: - Superior product features - Better quality/Reliability - Convenience - Brand Image

Differentiated Products

• Does a better job on existing features
• Does more Jobs (ex apple iPhone & Facebook)
• Does a unique job (Propecia or Nike)

Customer Segmentation

• The analysis of customer needs to identify groups of buyers who are similar in the way they discriminate among (and value) product or service offerings

Consumption Chain

• Mapping how consumers become aware, find, select, purchase, deliver, pay, use, etc.

Differentiation Performance

• Make choices that are different with what the rivals are doing
• Net Promoter Score (NPS) is a strategy tool for assessing customer satisfaction
• Delight and awesome products come from something unexpected than competitors

Product Differentiation

• When products are differentiated through marketing, via advertisements, promotions, and other marketing activities

Chapter 6

• Business Unit Strategy: the search for competitive advantage within a single industry, market, or line of business
• Corporate Strategy: the search for value and competitive advantages through participation in several different industries and markets
• Movement into adjacent markets by a firm along its own value chain (movement in the direction of sales, service, or warranty operations is forward integration)
• movement into an adjacent, or unrelated, market that is not along a firm’s own value chain

Diversification

• Inverted between corporate diversification and profitability (upside-down-shaped U)
• Firms that compete in a few related industries or markets outperform firms focused on a single industry
• Firms that compete in many unrelated industries performs worst than those in a few related
• High levels of diversification lead to lower levels of performance

Levels of Diversification

• Single Business : a firm earning more than 95 percent of the revenues from a single line of business
• Dominant Vertical Business: a firm that earns more than 70 percent of its revenue from its main line of business and the rest from businesses located along the value chain
• a firm that earns more than 70 percent of revenue from its main line of business and the remainder from other lines across different value chains
• Related-constrained Diversification : other lines of business share product, technological, and distribution linkages with the main business
• a firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately
• Unrelated Diversified Firm: competes in product categories and markets with few or any links

Slack and Synergy

• Unused Resource capacity
• Activities where the average cost producing two products is less when delivered together
• Skill - an individual and collective firm’s management team to engage in value activities
• the different elements of a system that creates more value together

Shared Knowledge and Models

• collective knowledge that can be distributed throughout the organization to create value
• a method to enable the creation and exchange of value between companies and their customers
• Conceptualization of a business that applies to seemingly unrelated markets

Spreading Capital from Within

• Increase corporate value by investing in business units with greater potential growth in the future
• The movement of funds directed by leaders to the firm to give the internal capital market
• Works to enhance capabilities through “long leaps” and “short hops”

Stopping Competitors

• Stopping the move of entering a market, keeping them from that market space
• Primary through acquisition can shorten lead times and reduce the overall costs of technology development