MGT 490: Midterm 1 (Ch 1-5)

• Mid-term 1 study material is available for MGT 490, Spring 2025, and covers chapters 1-5.

Definition of Strategy

• Strategy involves a firm creating a theory on how to gain a competitive advantage.
• Eisner's theory example: People pay premiums for extraordinary entertainment, and to supply this, resources should be redeployed differently.

Strategic Management Process

• Strategic management involves a sequence of mission, objectives, external & internal analysis, strategic choice, strategy implementation, and ultimately competitive advantage.
• Objectives are specific, measurable, achievable, and should influence elements in strategic management.

External and Internal Analysis

• External analysis involves PESTEL and Porter's Five Forces.
• Internal analyses uses VRIO: Valuable, Rare, Inimitable, Organization.
  • Resources, capabilities, and competencies

Strategic Choice Levels

• Corporate Strategy: Deciding "what" markets to enter.
• Business-level Strategy: Determining "how" to compete and win in those markets.

Strategy Implementation

• Strategy implementation involves figuring out how strategies are carried out, and who will do what.
• Organizational structure and control mechanisms are essential.
• Ensuring a strategy-structure fit is crucial.
• Strategy implementation is as important as strategy formulation.

Competitive Advantage

• Competitive advantage refers to a firm's ability to generate more economic value than its competitors.
• Creating more economic value than competitors. All elements of the strategic management process aim to achieve competitive advantage.
• There must be something different about a firm's offering vis-à-vis competitors.
• Competitive advantage is the result of doing something different and/or better than competitors.

Two Types of Competitive Difference

• Preference for output as customers choose a firm's output over others, including willingness to pay a premium (e.g., Nordstrom).
• Cost advantage is achieved through lower production/distribution costs (e.g., Walmart).
• The strategic management process identifies and exploits these differences.

Temporary and Sustainable Advantage

• Competitive advantage leads to high profits.
• Profits attract competition, which limits the duration of competitive advantage.
• Most competitive advantages are temporary as competitors imitate or offer something better.
• Some advantages are sustainable if competitors cannot imitate them or no one conceives of a better offering.
• Even sustainable advantages may be lost over time.

Competitive Parity

• Competitive parity occurs when a firm's offerings are "average."
• Customers do not have a preference for the firm's offering.
• The firm does not have a cost advantage over others, but what leads to parity is needed for success.

Competitive Disadvantage

• Competitive disadvantage: Customers may have an aversion to the firm's offerings.
• A firm may have a cost disadvantage, outdated technology/equipment, or a bad reputation (ex: Walmart's labor and location policies.)

Measuring Competitive Advantage

• Evidence of competitive advantage presents itself in the superior economic performance.
• Measuring the specific source of advantage is typically impossible.
  • "Measuring" technology is difficult.
  • Easily identifiable advantages invite imitation.

Measuring Advantage Financially

• Accounting measures: ROA, ROS, ROE, etc., exceeding industry averages.
• Economic measures: Earning a return exceeding the cost of capital.
• A firm could achieve competitive parity and survive but would face a flat demand curve and have industry average cost structure.
• Firms need to adapt their strategy over time to survive, and they will fail if they do not.
• In order to thrive and achieve a competitive adavantage, strategy will be about discovering and exploiting differences.

Intended and Emergent Strategies

• The strategic management process leads to intended strategies, but conditions change.
• Managers must respond and adopt emergent strategies, for example: Honda motorcycles.

Essence of External Analysis

• External forces group into six segments, Political, Economic, Sociocultural, Technological, Ecological, and Legal and is a way to scan, monitor, and evaluate
• Political factors are pressure that government organizations can exact on firms through public relations and litigation.
• Political pressures lead to changes in legislation.
• Economic Factors are Largely macroeconomic and affect economy wide phenomena such as growth/employment rates, interest rates, price/currency exchange rates.
• Sociocultural factors involve Society’s cultures, norms, values (constantly in flux, differ across groups, monitored by strategic leaders) and Demographic trends:Population/Characteristics.
• Technological advances in processes include: Lean manufacturing, Six Sigma quality, genetic engineering, artificial intelligence, and quantum computing; while product technology includes; Drones, wearable devices, high-performing electric cars; along with in artificial intelligence and machine learning.
• Environmental issues include: Broad natural environments undergoing climate change, needing sustainable economic growth and can be Adversarial or can provide business opportunities.
• Legal Factors include: Official outcomes of political processes often coexist with or result from a political influence and result In deregulation.

Porter's Five Forces Model

• This model helps strategic leaders understand the profit potential in different industries.
• It is also helpful for a leader to understand sustain a competitive advantage by understanding the threat of entry through economies of scale, network effects, or credible threat of retaliation.
• Power of suppliers can cause lower industry profit potential if suppliers demand higher prices for their inputs or capture part of the economic value.
• Lower industry profit potential happens if buyers get price discounts, reducing revenue; or, buyers demand higher quality/service, raising production costs.
• Buyers are price-sensitive when their budget represents a significant portion of its procurement budget, or, buyers earn low profits or are short of cash or Buyers’ product/service quality doesn't get affected much from inputs Substitutes Meet the same basic customer need in a different way/industry and is seen in software/professional services, gasoline vs. biofuel, Energy drinks vs. coffee, Videoconferencing vs. business travel, Wireless phone services VS internet-based services (Skype) Rivalry Among Competitors
• Intensity of competition increases over market share and profitability, with strong pressures leading to stronger influences

Internal Analysis

• Internal analysis help understand strength/weaknesses in comparison to competitors and is used to determine sources of comparative advantage
• Resource-Based View helps answers "why do some firms achieve better economic performance than others?" and drives performance.
• A firm's resources and capabilities are the primary drivers of competitive advantage and economic performance, and tangible and intangible assets of firms tangible ones include reputation.
• Skill and abilities that enable a firm to take full advantage of other resources
• Resources are either financial, physical, human or organizational
• Resources heterogeneity comes from firms having different bundles/capabilities as a manager bundles for competative advantage
• The VRIO framework is how firms access their Value, Rarity, Inimitability and Organisation
• A resource is valuable is it allows a firm to exploit an external opportunity or neutralize an external threat or reduce cost or increase income.
• Resources need to enough to offset competion (ie drugs still being scarse)

The VRIO Framework

• If a firm's resources are:Not Valuable, they risk Competitive Disadvantage; if they are Valuabl/Not Rare they have only a Competitive Parity and Valuable/ Rare- > Competitive Advantage
• Costs of Imitaiton exist in first mover advantage or path dependance
• A causal link between firm advantage be must be Understood and Social complexity must be so intricate that manager can't manag/copy it
• Patents are Two sides which offer periods of protection and lower imitation with timing if its able to defends its right.
• The firm must also Aligned so as for structure to Control mechanisms which will lead to Sustained Advantage
• There's also a competative dynamic of resource imitation

Competitive Dynamics

• A firm serving in a diff Market OR a response may hurt its own competitive advantage OR wants to reduce/manage tacit collusion causes action; where as strategy is Monsanto doing fundamental change and Mimetic change for partity or "action to tweak".
• Imitation might not lead to competitive space with firms using capabiliesto fill unique places in competitive space

Assumptions Of Internal Anaylsis

Are firms that are in competative advantage stem from resources and capabilities with VRio

Product Differentiation

• This increases the perceived value as that customers prefer over Competitors, making their products more attractive and filling customer needs and desires.
• Products should be filled with Image, beauty, safety , furthering a cause Hunger, status , quality ,reliability in use /Comfort ,style or belongingness
  • These must also have products attributes - Features, complexity and timing • In Customer - relationships is what enables trust
• Customization—creating a unique diamond bracelet for Customer marketing.
• These are linked with functions - product mix, advertising, locations and support

Valuable (Vrio)

To create value it must be difficult to maintain/replicate Differentiation can lead to more customers as there is evidence of a differentiation product leading to greater sales volume.

Imitability of product Differentiation

if the product is not different as imitation is so costly it doesn't occur due to historical uniqueness, causal ambiguity all create social dynamics. This lead a firm to Organize in structure and controls to make it efficient while rewarding team efforts in creativity

Cost Reduuction

Use structure to manage management while enforcing policies - but that structure will only be different between Rolex and toyota

• Product differentiation creates customer preferences.
• Preferences allow firms to make above-normal profits.
• Almost anything can be a base of differentiation.
• Bases of product differentiation that meet the VRIO criteria may generate competitive advantage.
• A product differentiation strategy is only as good as its implementation.

Product differentiation principles can be applied to your personal and professional lives.