MGT 490: Chapters 1-5

• The provided material covers study material for MGT 490, Spring 2025, Mid-term 1, specifically chapters 1-5, and is dated Feb 2025.
• The main topics include strategy, competitive advantage, and the strategy formulation process.

Definition of Strategy

• A firm's strategy involves the theory of how it will achieve a competitive advantage.
• Eisner's theory suggests that people will pay a premium for extraordinary entertainment if a firm redeploys its resources to provide it.

Strategic Management Process

• The strategic management process involves: Mission → Objectives → External/Internal Analysis → Strategic Choice → Strategy Implementation → Competitive Advantage.
• Objectives should be specific, measurable targets that a firm needs to achieve to fulfill its mission; they also influence the strategic management process.
• The strategic management process analyses the external systematic environment, using PESTEL and Porter's 5 forces.
• The strategic management process includes an internal analysis using VRIO (Value, Rarity, Imitability, Organization).
• Strategic choice involves deciding "what" markets to enter at the corporate level and "how" to compete and win in that market at the business level.
• Strategy implementation details how strategies are carried out and who is responsible, involving organizational structure and control to ensure a proper strategy-structure fit.
• All elements of the strategic management process are aimed at achieving a competitive advantage.

Competitive Advantage Definition

• Competitive advantage is the ability to generate more economic value than competitors.
• To achieve and sustain a competitive edge, ensure offerings differ from competitors.

Economic Value

• Competitive advantages typically derive from high profits, but profits attract competition, which limits the duration of competitive advantage.
• Competitive advantages are often temporary because competitors imitate or offer something better.
• Competitive advantages are sustainable if competitors cannot imitate the source, or if no one conceives of a better offering.
• Sustainable competitive advantage may be lost over time.

Competitive Parity

• Competitive parity indicates average firm offerings without preference, or any cost advantage over others, which may still be critical to success.

Competitive Disadvantage

• Competitive disadvantage arises from aversion to the firm's offerings, a cost disadvantage, outdated technology, or a negative reputation, citing Wal-Mart's labor and location policies as an example.

Measuring Competitive Advantage

• Superior economic performance often shows competitive advantage.
• Measuring the exact source of advantage is nearly impossible.
• A easily identifiable source of competitive advantage is unwanted since this leads to it becoming easily copied.

Financial Measurement of Competitive Advantage

• Competitive advantage measured financially includes accounting measures like ROA, ROS, and ROE exceeding industry averages and earning a return above the cost of capital.

Economic Returns

• Competitive advantage means economic returns are above normal and exceeding expectations.
• Competitive parity means economic returns are normal and meeting expectations.
• Competitive disadvantage means economic returns are below normal with failing expectations.

Emergent vs Intended Strategies

• The strategic management process leads to intended strategies.
• Managers adopt emergent strategies in response to changing conditions or new information.

Competitive Parity

• Achieving competitive parity allows firms to survive, facing a flat demand curve with an industry-average cost structure.
• Adaptation over time is essential for firms to survive, strategy wise.

Competitive Advantage in Strategic Management Process

• The strategic management process helps achieve competitive advantage, which relies on discovering and exploiting differences, and is often critical for success, distinguishing mediocrity from excellence.

External Analysis

• External analysis helps firms discover threats and opportunities, assess industry profitability, understand competition, and make informed choices.
• Two frameworks for external analysis are PESTEL and Porter's 5 forces.

The PESTEL Framework

• PESTEL groups environmental factors into Political, Economic, Sociocultural, Technological, Ecological, and Legal segments.
• PESTEL is a way of identifying and evaluating external factors.
• Political factors include public relations and litigation, and often lead to changes in legislation.
• Economic factors include growth rates, employment levels, interests rates, level of inflation, and currency exchange rates.
• Sociocultural factors are trends relating to norms, values and society, and influence demographic trends (age, gender, family size, etc).
• Techological factors include creating new products and processes using genetic engineering and artifical intelligence.
• Environmental factors relate to the natural environment, climate change etc, and can influence business opportunities.
• Legal factors include laws, mandates, regulations etc; and often affect the political will of the sector.

The Porter Five Forces Model

• The Porter Five Forces Model assists strategic leaders in understanding the profit potential, and how to sustain competive advantage in that sector
• The Porters Five force model views competition as broad and profitential driven
• Porter's Five Force Model includes threat of new entrants, power of suppliers, power of buyers, the threat of substitutes, and competitive rivalry.
• The threat of entry is the potential risk of competitors entering an industry.
• Entry can be hindered by economy of scale, neworking effects, customer switching costs etc
• Suppliers can potentially lower an industries profit margin if they drive up prices for their inputs.
• High Industry profit potential can be achieved with lower prices and by buyers demanding a higher quality of service.
• Customer sensitive buyers earn lower profits and are short on cash.
• Substitutes meet the same basic customer needs in different forms.
• The rivalry among competitors is the degree with which businesses in the same industry compete for market share and profitability.

Internal Analysis

• Internal analysis provides a comparative look at a firm's capabilities, by pinpointing the firm's strengths and weaknesses, and comparing the findings with direct competitors in that sector.
• Internal Analysis helps a firm determine if its resources and capabilities are likely sources of competitive advantage and establish strategies and any sources of competitive advantage

Resource-Based View

• The Resource-Based View developed to answer the following question "why do some firms achieve better economic performance than others?".
• The Resource-Based View assumes a firms resources and capabilities are the primary drivers of competitive advantage and economic performance

Resources and Capability Terminology

• Resources are what is used to conceive and implement strategies
• Capabilities are the tools and abilities which enable a firm to bring its full advantage and other resources.
• There are four main resource categories: Financial, Physical, Human and Organizational.
• There are two assumptions in the RBV: Heterogenity and Immobility.
• Different firms may have different resources (Heterogeneity).
• It may be costly for forms to acquire or develop other forms to develop (immobility).
• Heterogeneity of resources typically occurs as the result of "bundling" the resources and capabilities of a firm
• The key test for a resource or capability is the VRIO framework.

VRIO Framework

• You must consider four key questions: Value; Rarity; Imitability; and Organisation
• If a firm has resources that are valuable, rare, costly to imitate, and the firm is organised to expolit these resources then their firm can expect a sustained competive advantage

Applying the VRIO Framework

• The resources or bundle of resources should be subjected to each question to determine the competive implication of the resource.
• Each queation is subjected to competetive environment of analysis.
• The Question of Value entails a value system enableing the firm to exploit its external opportunity or neutralise an external threat.
  • Does the resource or process improve revenue or decrease cost? Example Levi's
• Are all the resources related to the sector rare? If not, then it would be easy to enter the market and would lead to no long term profit gains.
• Competetive pressure has already been made
• Keynote: Several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarce – look at prices.
• The temporary cost advantage of value and rate can be sustained only if competetors can find a a cost benefit / advantage in imitating resources
  • Intangible resources are more costly to imitate than tangible resources. Example Harley Davidson.
• High cost to imitate is a big hit- as long as a subsitute cannot be formed

Imitation

• Unique historical conditions (Caterpillar) -First mover advantages -Path Dependence - Cusual Ambiguity Example Southwest Airlines -Bunding of resources fog the casusal links - The social relationship entitled in resource may so easy, it is complex to manage it
• Patents
• Patents are a edge sword
  • Time window only, you must get it granted, and defended

Additional VRIO Information

• Economic perspective + Competetive advantage
  • Not and valuable = disadvantage
    • Valuable and not rate = Paridy (normal)
    • Competive dynamics for new players
    • No Action = Not threatened, market differences - Changes is the market requires changes in strategy
      • Use resources to be competive and fill the cap in the market

Business Level Strategy

• Detriments of econmic performance are firms' characterics
• This includes; Heterogenity and immobility

Product Differentiation

• Valuable, Rare, organized.
• CA will be sustained and organized in a good way- CA .

Business Strategy

• This is a 4 part section to choose business level straegy
• Can be classified as Porters four generic levels .

Porters Four Generic Levels

• Cost Leadership
• Differentation
• Cost Focus
• Differentation /Focus market

Porters Models

• Broad cost leadship Broad Differentation

PESTLE

Focus cost - leardship
 -Focus Differentation

• • The key is to maximise profitability, while minimising cost*

Strategy

• Create economic value that is lower than all competition to save money Example WalMart
• Product differentation = is key, a product the customer prefere over competitor products , an example of this is harley Davidson
• The managers make decisions on who has the best control , in all cases the brand needs to understand the cost .

Cost Advantage

• If a firm is more effective / more effective at the process, they will gain a stronger experience / brand.

Cost Advantage examples

• Economy of Scale
• Learning curve economic
• Technology indepent of scale
• Policy choices

. These are all choices that will have an incentive cost at every opportunity and at each level, giving power.

Policy Choices

• This lets a firm chose how they will sevre the market through quality and incentive opporunties, an good example of this is SOUTWEST AIRLINES

Value and Implentation

• Value and Implentations source will lead to comptetive advantage if the source is valuable, rate and costly to imitate. For example ,Walmart which leads to compriotos all to price competitoon.

Rarness and Cost Advantage Dependence

• Emergging sectors must be handled appropriately Economies of scale not rare, Diseconomies of scale rare. differential imports.
  • Not very imitable - can be replicated easy
• Tech is protected
  • Cannot be easily immitates

Low v High Cost Conditions

• LCC is - industry capacity and demand, non proprietor the technology
• HCC Balanced industry

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Three Organism structure - 3 options

• Simple = Owner / manager . makes a devision the manager and manager makes it
  • Easy to follow , hard to scqale as they grow in size
  • The other is functional as it increases in size.
• Functional = CEO responsible ofr streagey and decision - is best to ensure all are involved in cost cutting
• Multi divisional = the division repicase functions as appropriate

Key Controls

• budget, credit, spending polocoes Culture attitude leadership They must reinfornce manager controls . • A product has custom prefence then its rare, if customer purchase then the product is also reaer- the price point must make sense Logic and cost of them have to match