MGT 490: Strategy, Competitive Advantage

• The text provided is study material for MGT 490, Spring 2025 mid-term 1, covering chapters 1-5.
• The material includes topics like strategy, competitive advantage, and the strategy formulation process.

Definition of Strategy

• Strategy is defined as a firm's theory on how to achieve a competitive advantage.
• Eisner's theory suggests people pay premium for extraordinary entertainment, utilizing resources uniquely.

The Strategic Management Process

• The strategic management process involves mission, objectives, external analysis, internal analysis, strategic choice, strategy implementation, competitive advantage,
• Strategic management objectives should be specific, measurable, and influence strategic management elements.
• The components to External analysis includes PESTEL and Porter's 5 forces

Strategy Implementation

• This involves how strategies are executed and who is responsible
• Organizational structure and control are key, ensuring fit with the chosen strategy
• Strategy implementation is as critical as strategy formulation.

Competitive Advantage

• Competitive advantage constitutes a company's ability to create more economic value than its competitors.
• All elements of strategic management aim to achieve a competitive advantage.
• Must be something different about a firm's offering compared to competitors and results from doing something better or different than competitors

Two Types of Difference for Competitive Advantage

• Preference for firms output where consumers choose the firm's product and are willing to pay a premium, such as Nordstrom.
• Cost advantage over competitors via lower production/distribution costs, like Wal-Mart.

Temporary and Sustainable Competitive Advantage

• It can result in high profits, attracting competition.
• Competition often limits its duration.
• Most competitive advantages are temporary due to imitation or better offers by competitors.
• Sustainable when competitors cannot imitate the source or conceive a better offering.
• However, over time, even sustainable competitive advantage can erode.

Competitive Parity

• Occurs when a firm's offerings are average and do not hold a cost advantage

Competitive Disadvantage

• Where people have an aversion, high costs, outdated technology, and negative reputation, as seen in Walmart's labor and location policies

Measuring Competitive Advantage

• Superior financial performance signifies competitive advantage.
• It's easier to see than the source of the advantage.
• Measuring is typically impossible.
• Accounting measures such as ROA, ROS and ROE etc that exceed industry averages
• Economic measures such as earning a return in excess of the cost of capital

Emergent vs. Intended Strategies

• The strategic management process results to intended strategies
• Changing conditions require managers to adopt emergent strategies, exemplified by Honda Motorcycles.

Strategic Management Process Summary

• Firms achieving competitive parity can survive with a flat demand curve and industry-average cost structure
• Adapting strategies over helps survive, failing to adapt results in failure
• The strategic management process enables managers to gain competitive advantages, relying on differences in order to thrive.
• Strategy differentiates success from failure, distinguishing great managers and guiding purpose

External Analysis

• Enables firms to discover threats/opportunities, assess industry profitability, understand competition, and make informed strategic choices.
• Main frameworks include PESTEL and Porter's Five Forces.

The PESTEL Framework

• Groups environmental factors into six segments: Political, Economic, Sociocultural, Technological, Ecological, and Legal
• Political factors involve the effect of pressure that government organizations can exert to influence the firm in the form of public relation and legislation.
• Economic factors involve the effect of macroeconomics that effect economy wide phenomena in the form of growth rates,employment level, interest rates, price stability, and exchange rates.
• Sociocultural factors involve society's norms and trends, and demographic trends
• Technological factors include application and development of new processes and products
• Environmental factors include the relationship of organizations and the natural environment through sustainable economic growth
• Legal factors include laws and mandates that result from a political will

Porter's Five Forces

• Helps understand industry profit potential and positioning for sustainable competitive advantage.
• Competition is viewed broadly, and profit potential depends on competitive forces.
• The five forces include: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products/services, and rivalry among existing competitors

Threat of Entry

• Potential competitors entering the industry is a risk.
• Entry barriers include: economies of scale, network effects, customer switching costs, capital requirements, advantages independent of size, government policy and credible threat of retaliation

Power of Suppliers

• Pressures that suppliers can can have on on an industry's profit potential occurs when they demand higher prices for their inputs or capture economic value created.

Power of Buyers

• Industry profit potential occurs when the buyers get price discounts, reducing revenue and demand higher quality service, rising production costs
• When buyers are price-sensitive the buyers purchase represents a significant portion of its procurement budget
• Buyers earn law profits and product service quality isn't affected by the cost inputs

Threat of Substitutes

• Basic customer needs occurs when offered in a different way and available from outside the given industry
• Software instead of services, gasoline vs biofuel.
• Energy drinks instead of coffee.
• Video conferencing instead of travels.
• Wireless phone services instead of internet services.

Rivalry among Competitors

• The intensity of competitive rivalry include ranges from genteel to cut throat
• Other forces in the model pressure this rivalry
• The stronger the forces, the stronger competitive intensity

Competitive Industry Structure Is Defined By

• Size and number of competitors
• A firms degree of pricing power
• Type of product or service
• Height of entry barriers

Internal Analysis

• Provides comparative look at capabilities, determining firms strengths and weaknesses as well as how they stack up to competitors
• It helps determine if resources and capabilities are likely sources of competitive advantage and establish strategies that will exploit any sources of competitive advantage

Resource Based View

• Developed to answer why some firms achieve better economic performance than others?
• Resources and capabilities enable firms to achieve superior performance and competitive advantage
• A firm's resources and capabilities are the primary drivers of economic performance and competitive performance

Resources and Capabilities

• Tangible and intangible assets like factories and reputation used to implement strategies
• Skills and abilities to take full advantage of resources like marketing and coop relationships

Resource Categories

• Can be categorized as financial, physical, human, and organizational.

RBV Assumptions

• Resource heterogeneity: Different firms have different resources.
• Resource immobility: Costly to acquire/develop certain resources; some don't spread easily

Resource assumption Meanings

• If one firm has resources some firms don't, and can't be emulated the firm will likely a sustained advantage

Resource Heterogeneity

• Typically occurs by “bundling” resources

VRIO Framework

• Framework that ask questions of value, rarity, imitability, and organization

VRIO Explained

• A firm can expect to gain sustained competitive advantage if the resources are valuable, rare and costly to imitate and the firm is organized to exploit

Applying VRIO

• A resource or bundle of resources are put towards determining what the implication this has one the competition and the tool

Value Question

• Does it create external opportunity, and neutralize external threat? Does result in more revenue, decrease in costs

Rarity Question

• Has a perfect rate of competition, in order to establish advantage and high profit by creating scarcity

Imitability Question

• Temporary competitive advantage sustains
• Imitating a resources

Imitation Costs

• Unique conditions, causal ambiguity, patents all affect imitation costs

Organization Question

• Is the structure alligned with giving people incentives, and abilities given the firms resources

Imitation of Resources

• It is the strategic decisions that effect other firms

Economic Performance Determinants

• Assumes that these are firm level that can effect resources

Resource Based View

• The sustainment rate of the capabilities and resources is greater than the advantages

Generic Business Level Strategies

• Cost leadership such as Walmart
• Product differentiation such as Harley Davidson

Cost Advantage Understanding

• Helps managers figure out who's holding the advantage in a market place

Scale Economies

• Average cost per unit falls as quantity increases, creating a cost advantage difficult to match, potentially through international exansion

Diseconomies of Scale

• Occur when firms become too large and beauractic, a advantage to non scaling

Curve Economics

• Creates more effective process because the more difficult and technical, the more advantages of being able to do so

Independent Tech

• Allows small firm to become cost competitive such as vegetable inspection

Implemented Strategy

• Implementation through organizational structure and control including management responsibilities

Three structure

• Simple, function, Multi divisional

Three organization Structure

• Management make the decisions and the firm can easily grow with complexity
• Functional, structure, dividing by the management
• Multi, Functions are division

Cost and Lead Structure

• In cost leadership an organized practice ensure efforts in a common way

Management Controls And Policies

• Implemented and controlled

Organizational and Contol

• Management are focused through compensation

Rareness

• Can be seen as a scale
• Independent rare that can be used and offered with quality is affordable
• Focuses on custom preferences

Product attributes categories

• Include customer relationship, links among and between

Link Base

• Distro channel through gas stations, and gas stations changing oil

Meeting Criteria

• A product should meet what customer are asking of the product

Organizational Strategy

• Team need to work together to stay creative and efficient
• Each team should be rewarded appropriately
• Firms need to be able to implement both simultaneously such as Lexus and Toyota

Base Differentiations

• It is the customers preferences that allow the making of above normal profits
• The VRO criteria may generate advantage which to be implemented