MGT 490: Chapters 1-5 - Strategy & Management

• MGT 490 study material covers chapters 1-5 for Mid-term 1

Strategy Definition

• Strategy is a firm's theory on gaining competitive advantages
• Eisner's theory suggests that people pay a premium for extraordinary entertainment

The Strategic Management Process

• The Strategic Management Process involves several steps that lead to achieving competitive advantage:
  • Mission -> Objectives -> External and Internal Analysis -> Strategic Choice -> Strategy Implementation -> Competitive Advantage
• Objectives should be specific, measurable, and influence elements in the strategic management process.
• The strategic management process leads managers to intended strategies
• Changing conditions and new information often cause managers to adopt emergent strategies
• All other elements of the strategic management process aim to achieve competitive advantage
• Strategy is about discovering and exploiting differences to achieve competitive advantage
• Strategy is often the difference between success and failure, great and average managers, and purpose vs stumbling

External and Internal Analysis

• External Analysis involves PESTEL and Porter's 5 forces
• Internal Analysis involves analyzing VRIO (Value, Rarity, Imitability, Organization), Resources, Capabilities, and Competencies

Strategic Choice

• Business-level strategy defines how a firm competes and wins in a market.
• Corporate strategy defines what markets a firm should enter.

Strategy Implementation

• How strategies are carried out and who does what is determined during strategy implementation
• Organizational structure and control determine strategy-structure fit
• Strategy implementation is as important as strategy formulation

Competitive Advantage

• Definition: Creating more economic value than competitors via a firms offering vis-à-vis competition
• Competitive advantage depends on differences
• To achieve it you can use the strategic management process to find and exploit differences
• Competitive advantages typically result in high profits, which attract competition
• Most competitive advantages are therefore temporary
• Sustainable competitive advantages arise when competitors cannot imitate the source of advantage or conceive of a better offering.
• Competitive parity means the firm's offerings are "average" with no preference from consumers or cost advantage
• Competitive disadvantage occurs when people have aversion to the firm’s offering, cost disadvantage, outdated tech, or negative reputation.
• Superior economic performance indicates competitive advantage
• Measuring the source of competitive advantage is generally impossible
• Superior Economic Performance implies evidence of competitive advantage
• Measuring competitive advantage can be done financially;
• Accounting Measures i.e. ROA, ROS, ROE that exceed industry averages
• Economic Measures i.e. earning a return in excess of the cost of capital
• Firms can achieve competitive parity and survive, facing a flat demand curve and adapting strategy, but strategic management is about thriving through competitive advantage

Emergent vs Intended Strategies

• The strategic management process leads managers to intended strategies
• Changing conditions and new information cause managers to adopt emergent strategies

External Analysis

• External analysis discovers threats/opportunities, assesses industry profits, understands competition, and informs strategic choices.
• PESTEL and Porter's 5 forces are main frameworks
• The PESTEL framework groups environmental factors into six segments to scan, monitor, and evaluate external factors:
• Political: Government organizations’ pressure and their influence on a firm, e.g., public relations, litigation
• Economic: Macroeconomic factors affecting economy-wide phenomena, e.g., growth rates, employment, interest rates, inflation/deflation, currency exchange rates
• Sociocultural: Society’s cultures, norms, values, and demographic trends, e.g., population characteristics, age, gender, family size, ethnicity, socioeconomic conditions
• Technological: Application of knowledge to create new processes and products, e.g., lean manufacturing, six sigma, genetic engineering, AI, quantum computing, drones, wearables, electric cars
• Ecological: Issues such as natural environment, climate change, and sustainable economic growth. The relationship between the organizations and the environment could be adversarial
• Legal: The official outcomes of the political process, often coexisting with or resulting from a political will.
• Five Forces Model understands profit potential
• The model positions firms for competitive advantage, viewing competition broadly and seeing profit potential as function of 5 forces

Porter's Five Forces

• Threat of New Entrants: The risk competitors joining the industry
• Entry Barriers: Economies of scale, network effects, customer switching costs, capital requirements, advantages independent of size, government policy, threat of retaliation
• Bargaining Power of Suppliers: Pressures suppliers can exert on an industry, lowering industry profit potential if:
  • Suppliers demand higher prices or capture part of the economic value created
• Power of Buyers: Buyers impact profit potential from price discounts or service demands, especially when price-sensitive
• Threat of Substitutes: Alternatives that meet the same basic customer need from outside the industry.
• Rivalry Among Competitors: The intensity in market share/profitability, linked to pressures from other forces.

Competitive Industry Structure

• Number and size of competitors
• Firm’s degree of pricing power. -Type of product/service -Height of entry barriers

Internal Analysis

• Provides a comparative look at a firm’s capabilities, strengths, and weaknesses relative to competitors
• It determines if resources/capabilities are competitive advantages and establishes strategies to exploit them
• The Resource-Based View explains why some firms achieve better economic performance

Resource-Based View

• The Resource-Based View assumes primary drivers of competitive advantage and economic are from firm’s resources and capabilities:
• Resources are tangible and intangible assets
• Capabilities are skills and abilities that enable a firm to take full advantage of other resources Includes four resource categories:
• Financial: Cash, retained earnings
• Physical: Plant and equipment, geographic location
• Human: Skills/abilities of individuals
• Organizational: Reporting structures, relationships
• Resource Heterogeneity involves different firms having diff resources
• Resource Immobility involves firms struggling to acquire or develop resources, and may not spread easily
• If a firm possessing the valuable resources will likely gain a sustained competitive advantage

VRIO Framework

• Value, Rarity, Imitability, Organization can give sustained competitive advantage Applying the Tool: Resources are subjected to each question

Applying the VRIO Framework

• The Question of Value asks, "Does the resource enable the firm to exploit external opportunity or neutralize external threat?"
  • Levi's reputation allows premium charges
• The Question of Rarity asks, "Is there enough availability for perfect competition has not set in?"
  • Cholesterol-lowering example
• If a firm's resources are not valuable, the firm can expect competitive Disadvantage
• If a firm's resources are valuable, but not rare, the firm can expect competitive Parity
• If a firm's resources are Valuable and Rare, the firm can expect Competitive Advantage (at least temporarily)
• The Question of Imitability means the firm can enjoy period of sustained competitive advantage.
• Intangible > Tangible resources.
• Harley Davidson vs Razor scooters
• If the resource has unique historical conditions, causal ambiguity, social complexities, it makes it harder to copy it

Costs of Imitation

• Unique Historical Conditions
  • Are "First-mover" advantages
  • Path dependence
• Causal Ambiguity causes not being understood
• Social Complexity creates a limit
• Patents can be protective in the case of success
• if used properly they increase disclosure and limit ability to copy

The Question of Organization

• Aligns with the ability and means to exploit firm

Competitive Dynamics of Resource Imitation

• Involves response to another strategy

No Action Response

• Market not being served, advantage, resources in place, reduces rivalry

Change Responses

• Involve either:

• Tactics - Actions, Imitation, Advantage are Parity OR

• Strategy- Theory, Obsolete

• Firms must create unique resources/capabilities or imitation leads to no advantage

• Second movers may also have advantages

• Internal Analysis Assumes: - firm are different and may vary over time, using the VRIO for competative advantage

Resources & Capabilities

• Involves being Valuable, Rare, Costly to Imitate & Organized to Exploit

Business-level strategic choices

• Involves generic strategies via Porter
  • Cost Leadership strategy focuses on the lowest-cost producer in the industry.
  • Differentiation focuses on unique products/services to stand out from competitors.
  • Cost Focus targets a niche market with cost-efficient operations.
  • Differentiation Focus creates unique products for a specific market segment.
• Business Level Strategies must compete to generate value
• Focused- Broad marker share must be greater then the competitors

Broad Market

• Involves cost leader or differentiation

Narrow Market

• Involves only cost or differation

Cost Advantage

• Need to identify value, rare and imitate, organized

The "Big Picture" involves Entrants , Subtitutes with Barriers

• Suppliers , Byuers with Power

Rareness

• Revolves heavliy on the lifecycle
  • Economies of Scale, Scale, Economies, and Tech with Policy

Low Cost Imitation Involves

• Unbalanced Capacities, non propritary, Observable tech and exchanges made
• Opposite in Hight Cost Conditions

Implementing Cost Reductions

• Involves Structure, Responsibilities and policy to align values
• Involves using:
• Simple
• Function
• Multi Divisional

Organizational Structure

• Is very Owner / Manager centric and increases activity

• Divisional function with marketing responsibilities and a CEO perspective to coordinate function

• Must use structure, Responsibilities and policy to align values

Organizations Control

• Must use budget, credit , policy and purchases in a way to reinforce Management Must use:
• Culture
• Attitudes
• Styles

Must: use stock bonuses, cost reduction in the means and rewards for performance

• Cost Leadership & Compensation

Must be organized to Exploit resources available

Product Differentiation

• Involves increaseing the firms service, and/or value at the consumers preference
• Bases of differentiation must fill an unmet need
• wide range of customer needs can be filled by customer preference

There are 3 categores of Value

Product Attributes, Firm Relationships, and links of the products

• To organize value the value most revolve around the following to avoid immitation:
  • Timing location, Reputation and function

Imitability of Product Differentition

• Requires high value, and substitional limitations -Organizational structure Management rewards -Is the product different with the consumers preference
• By improving structure, responsibilities and aligned policy
• Must choose to compete on cost or differation depending on the market or environment
• Each stage is critical for each element of the firm

Product differentiation

• Is linked to personal preference and application of all factors with policy structure and rewards