MGMT 4312: Strategy, Mission & Competitive Advantage

• MGMT 4312 Study Guide

Strategy and Mission

• A strategy is a firm's theory on gaining and sustaining competitive advantages.
• A mission defines the firm's long-term purpose, outlining aspirations and what to avoid.

Strategic Management Process

• It's a series of analyses and choices designed to improve the chances of choosing a strategy that leads to competitive success.

Visionary Firm

• A visionary firm's mission is central to all they do

High-Quality Objectives

• High-quality objectives tightly connect to the mission and are measurable over time.

Internal vs. External Analysis

• External analysis identifies threats and opportunities in the competitive environment, including the evolution of competition and its implications.
• Internal analysis identifies organizational strengths and weaknesses, helping understand potential sources of competitive advantage and areas needing improvement.

Competitive Advantage

• A firm achieves a competitive advantage by creating more economic value than its rivals.
• Economic value is the difference between perceived customer benefits and the product's full economic cost.
• The competitive advantage's size is the difference between the firm's economic value creation and its rivals'.

Types of Competitive Advantage

• Temporary Competitive Advantage: Short-lived advantage.
• Sustained Competitive Advantage: Long-lasting advantage.
• Competitive Parity: Creating the same economic value as rivals.
• Competitive Disadvantage: Creating less economic value than rivals.

Accounting Performance

• Above Average: Performance surpasses the industry average, indicating competitive advantages.
• Average: Performance equals the industry average, often with competitive parity.
• Below Average: Performance falls below the industry average, usually with competitive disadvantages.

Financial Ratios

• Profitability Ratios: Measure profit relative to size or assets.
• Liquidity Ratios: Assess a firm's ability to meet short-term obligations.
• Leverage Ratios: Indicate financial flexibility, including debt capacity.
• Activity Ratios: Focus on the level of activity in a firm's operations.

Accounting vs. Economic Measures

• Accounting performance is based on published financial statements.
• Accounting measures exclude the cost of capital.
• Economic measures compare return level to the cost of capital, not just the industry average.
• Cost of capital is the rate of return firms promise to pay capital suppliers to induce investment.

General Environment Elements

• Technological Change: Creates opportunities and threats, forcing firms to adapt.
• Demographic Trends: Distribution of individuals by age, sex, etc., influencing buying patterns.
• Cultural Trends: Societal values, beliefs, and norms that shape behavior.
• Economic Climate: Overall health of economic systems affecting firms.
• Legal and Political Conditions: Laws and the legal system's impact on business.
• Specific International Events: Wars, political events, recessions, etc., affecting strategies.

Five Forces Framework

• Threat of Supplier Leverage.
• Threat of Substitute Products.
• Threat of Competition Among Existing Companies.
• Threat of New Competition.
• Threat of Buyers' Influence.

Supplier Leverage

• Powerful suppliers can lower the focal firm's profits.
• Supplier power grows with few suppliers, highly differentiated products, lack of substitutes, forward integration potential, and insignificant dependence on the focal firm.

Substitute Products

• Substitutes cap industry prices and profits by meeting similar customer needs.
• Substitutes become critical when superior to existing products.

Competition Among Existing Companies

• Direct competition reduces profits through price wars, new products, ads, and rapid actions.
• Intense competition arises with numerous similar-sized firms, slow industry growth, inability to differentiate products, and large production capacity additions.

New Competition

• The cost of entry determines if new competitors pose a threat.
• High entry barriers deter new entrants, even with competitive advantages among incumbents.
• Barriers to entry: economies of scale, product differentiation, cost advantages independent of scale, and government regulation.

Buyer's Influence

• Powerful buyers can lower profits by demanding lower prices and higher quality.
• Buyer power increases with few buyers, undifferentiated products, and product significance to the buyer.
• Signs of buyer influence: operating in a competitive market, backward vertical integration, and unified small buyers.

Suppliers vs. Competitors vs. Buyers

• Suppliers: Provide raw materials, which can impact firm performance via price or quality changes.
• Buyers: Purchase products.
• Competitors: Firms whose products diminish the value of another's product when both are available.

Competitor vs. Complementor

• Complementor: A firm whose product increases the value of another's product when used together.

Vertical Integration

• Forward Integration: Suppliers threaten firms by entering their industry.
• Backward Integration: Buyers enter suppliers' business to capture profits.

Fragmented vs. Consolidated Industries

• Fragmented Industries: Industries with a large number of small and medium-sized firms.
• Consolidated Industries: Industries dominated by a few large firms.

First-Mover Advantages

• Advantages for firms making early strategic and technological decisions.
• Sources: technological leadership, preemption of valuable assets, and creation of customer-switching costs.

Technological Leadership Strategy

• Technological leadership strategy: Strategic early investments in particular technologies.

Strategically Valuable Assets

• Strategically valuable assets- Resources firm requires to succesfully compete in an industry.

Customer-Switching Costs:

• Customer-switching costs: investments customers make to use a firm's products, making it harder to switch.

Firm Resources

• Resources: Tangible (factories, products) and intangible (reputation) assets of a firm.

Firm Capabilities

• Capabilities: Resources enabling full utilization of other resources (e.g., marketing skills).

Resource Types

• Financial: Cash, retained earnings.
• Physical: Plant, equipment, location.
• Human: Skills, abilities.
• Organizational: Reporting structure, relationships.

Resource-Based View Assumptions

• Resource Heterogeneity: Firms possess different resources.
• Resource Immobility: Costly for firms to acquire/develop certain resources; they don't spread easily.

VRIO Framework

• Value, Rarity, Imitability, and Organization guide resource analysis.

Resource Outcomes

• Competitive Disadvantage: Resources are not valuable.
• Competitive Parity: Valuable but not rare resources.
• Temporary Competitive Advantage: Resources are valuable and rare.
• Sustained Competitive Advantage: Resources are Valuable, rare, and costly to imitate.

Resource Value

• Theoretically: It exploits opportunities or neutralizes threats
• practically: It increases revenues, decreases costs, or both.

Resource Rarity

• Rare resources prevent perfect competition.

Resource Imitability

• Imitable: It can be replicated. Intangible resources are more costly to imitate.
• Imperfectly imitable: Difficult, but not impossible, to replicate.

Forms of Imitation

• Direct duplication: Copying resources of the firm with the competitive advantage.
• Substitution: Replacing costly resources with substitutes.

Costly Imitation Factors

• Unique Historical Conditions: Advantages from early acquisition/development in unique conditions.
• Path Dependence: Early events shaping competitive advantages.
• Causal Ambiguity: Inability to understand the link between resources and advantage.
• Social Complexity: Socially complex phenomena affecting management.
• Patents: May decrease imitation costs through disclosure.

Path Dependence

• Path dependence: Idea that today's decisions are shaped by past ones.

Value Chain

Value Chain Analysis answers the question:

• "What do we as an organization do that adds value for the customer?".
• Value Chain: Shows a product moves from the raw material stage to the final customer.

Business vs. Corporate Strategy

• Business-level considers positioning in the market.
• Corporate-level is about choosing which business to enter.

Generic Business Strategies

• Cost Leadership: Lower costs than competitors (e.g., Walmart).
• Product Differentiation: Offering preferred products (e.g., Harley-Davidson).

Cost Leadership Strategy

• Aims to be the lowest-cost producer in the market.

Sources of Cost Advantages

• Economies of Scale: Average cost decreases with quantity until the minimum efficient scale.
• Diseconomies of Scale: Advantage for those avoiding bureaucracy; a risk in international expansion (e.g., Nucor Steel).
• Learning Curve Economies: Efficiency increases with experience.
• Differential Low-Cost Access: May result from history, being first, endowments, etc.
• Technology Independent of Scale: Advantage accrues to technology "owner."
• Policy Choices: Decisions to lower production costs (e.g., Southwest Airlines).

Cost Leadership and the Five Forces

• New Entrants: Increases capital requirements.
• Substitutes: Limits attractiveness.
• Buyers: Lowers incentives for vertical integration.
• Suppliers: Increases importance of the focal firm to the supplier.

Abandoning Large Operations

• Escalation of commitment: Managers increase commitment despite limitations becoming clear.

Product Differentiation

• It increases perceived value relative to competitors.

Differentiation Interaction with the Five Forces

• Considers the threat of new entrants, rivalry, substitutes, suppliers, and buyers.

Product Differentiation and Cost Leadership

• Difficult to implement simultaneously because of organizational structure and management control issues (e.g., Rolex).
• But can implement both if some differentiation bases lend themselves to low cost (e.g., Toyota).

Study guide for MGMT 4312 covering strategy and mission. It includes strategic management process, visionary firms, and high-quality objectives. It covers internal and external analysis for competitive advantage.