Strategic Management: Chapters 1-5

• Mid-term 1 study material covers chapters 1, 2, 3, 4 & 5.

Definition of Strategy

• Strategy involves devising a firm’s theory on how to achieve a competitive edge.
• Eisner posited that people would pay premium for extraordinary entertainment, needing resources redeployment to offer something exceptional.

Strategic Management Process

• It involves a sequence of steps starting with mission and objectives.
• This includes external and internal analysis, leading to strategic choice.
• Followed by strategy implementation, ultimately resulting in competitive advantage

Objectives

• They must be specific and measurable
• Should align with achieving the firm's mission.
• Influence other elements in the strategic management process.
• Steelcon’s mission & objectives is an example.

External and Internal Analysis

• These analyses involve a systematic examination of the environment.
• External Analysis includes: PESTEL and Porter's 5 forces.
• Internal Analysis includes: VRIO which involves Resources, Capabilities and Competencies.

Strategic Choice

• The corporate strategy answers what markets to enter.
• Business-level strategy addresses how to compete and succeed in a particular market.

Strategy Implementation

• It involves how strategies are carried out and who is responsible for what
• Important are, organizational structure, controls, and ensuring a strategy-structure fit.
• Each strategic choice has implications for strategy implementation.
• Strategy implementation is as critical as strategy formulation.

Competitive Advantage

• It means having the ability to create more economic value than competitors.
• All elements of strategic management process are aimed at achieving it.
• This requires a differentiator of a firm's offering from competitors.
• Competitive advantage comes from doing things differently and/or better than competitors.
• Two main types of difference are; preference for the firm’s output, and cost advantage.
• Nordstrom is an example of Preference, whereas Wal-Mart is an example of Cost advantage.
• Gaining and sustaining advantages come from identifying and exploiting key differences.
• Examples of companies with advantages are Apple (iPod, iPad)

Temporary & Sustainable Advantage

• Competitive advantage typically generates high profits initially.
• This attracts competition, which limits the duration of competitive advantage.
• Most competitive advantages are temporary, as competitors may either imitate or surpass.
• Sustainable advantages are only possible when, competitors can’t imitate the source of advantage or no one conceives a better offering.
• Over time, even sustainable competitive advantages can be lost.

Competitive Parity

• It exists when the firm’s offerings are "average" and the firm doesn’t have a cost advantage over others.
• No one has a preference for the firm's offering.
• Some things that lead to parity may still be critical to success.

Competitive Disadvantage

• It arises when people have an aversion to the firm's offerings or when the firm has a cost disadvantage.
• It exists if a firm may have outdated technology or a negative reputation.
• Example could be: Wal-Mart’s Labor & Location Policies

Measuring Competitive Advantage

• It is easier to spot vs measuring its source.
• Superior economic performance indicates a competitive advantage.
• Measuring a source of the advantage per se is typically impossible
• Measuring technology is difficult.
• Copying a competitive advantage is easier when it's easy to identify.
• Accounting and Economic Measures are used.
• ROA, ROS, ROE exceeding industry averages are examples of accounting measures.
• Earning a return in excess of the cost of capital is an example of economic measures.

Competitive Advantage & The Strategic Management Process

• Intended strategies are reached when managers follow the strategic management process.
• Emergent strategies are adopted by managers in response to changing conditions.
• Honda Motorcycles is an example.

Strategic Management Process Summary

• Firms can survive with competitive parity, but will face a flat demand curve.
• Their cost structure would be the industry average.
• Adaptation is needed for a company to survive over time.
• Failure to adapt the strategy would mean failing as a business.
• This course is not about mere survival; it is about thriving—achieving competitive advantage.

Strategy is Often the Difference Between

• Success and failure, mediocrity and excellence.
• A great manager and average managers.
• Purpose and aimless stumbling.

External Analysis

• Firms can discover threats and opportunities.
• Asses whether above-normal profits are likely in an industry.
• Better understand the nature of competition in an industry,
• Make more informed strategic choices.
• Main external analysis frameworks are PESTEL and Porter's 5 forces.

PESTEL Framework

• It categorizes environmental factors into six segments: Political, Economic, Sociocultural, Technological, Ecological, Legal.

Political Factors

• They can exert pressure that government organizations can exert to influence the firm, including public relations and litigation

Legal Factors

• It coexist with or result from a political will and includes laws and Mandates

Economic Factors

• These are largely macroeconomic and include: Growth rates, Employment level, and Interest and currency exchange rates.

Sociocultural Factors

• These relate to society’s cultures, norms, and values.
• They are constantly in flux, differ across groups, and should be monitored by strategic leaders.
• This includes population characterisitics

Technological Factors

• Involve application of knowledge to create new processes and products.

Environmental Factors

• Broad environmental issues such as the natural environment and climate change.
• The relationship between organizations and the environment can be adversarial.

Porter Five Forces Model

• Helps strategic leaders understand the profit potential of different industries.
• It also helps position their firms to gain and sustain competitive advantage.
• Competition is viewed broadly in the five forces model.
• Profit potential is a function of the five competitive forces.

Threat of Entry

• Potential competitors entering an industry can be The risk.
• The risk is lowered by entry barriers: Economies of scale, network effects, Customer switching costs, and Capital requirements.

Power of Suppliers

• Suppliers' can influence an industry's profit potential and demands.
• Lowers industry profit potential if: Suppliers demand higher prices for their inputs
• Supporters capture part of the economic value created.

Power Of Buyers

• Buyers' can effect an industry's profit.
• Lowers industry profit potential if: Buyers get price discounts, reducing revenue.
• Buyers demand higher quality / service, raising production costs.

Threats of Substitutes

• Meet the same basic customer need in a different way, often from outside the given industry.
• Software vs. professional services, and Gasoline vs. biofuel.

Rivalry Among Competitors

• The intensity with which companies in the same industry jockey for market share and profitability
• Ranges from can range from genteel to cut-throat.
• The other forces in the model pressure this rivalry.

Internal Analysis

• Focuses ona firm's capabilities comparatively.
• Determines the film's strengths and weaknesses
• Examines how theses strenths weaknesses comparitively to competitors
• Determines if its resources and capabilities are likely sources of competitive advantage
• Establish strategies that will exploit any sources of competitive advantage

Resources and Capabilities

• Developed to answer: Why do some firms achieve better economic performance than others?
• Used to help firms achieve competitive advantage and superior economic performance.
• Assumes that a firm's resources and capabilities are the primary drivers of competitive advantage and economic performance.
• Resources are tangible and intangible assets of a firm (factories, reputation)
• Capabilities are skills and abilities that enable a firm to take full advantage of other resources (marketing skill, cooperative relationships)
• Financial resources like cash
• Physical resources like plant and equipment are critical.
• Human resources like the abilities of individuals
• And Organizational resources, like relationships make up capabilities.

Resource Heterogeneity

• Different firms may have different resources leading to resource heterogeneity.

The VRIO Framework

• If a firm has resources that are valuable, rare, costly to imitate and the firm is organized to exploit these resources: then the firm can expect to enjoy sustained competitive advantage.
• When applying the VRIO tool each resource is subjected to each question to determine the competitive implication of the resource and each question is put in a comparative sense to the competitive environment
• Caterpillar is an example of unique historical conditions.
• Southwest Airlines shows Causal Ambiguity.
• Wordperfect represents Social Complexity.

Competitive Dynamics of Resource Imitation

• Involves strategic decisions and actions of firms in response to other firms' strategic decisions and actions.
• One response is "No Action” Response (Rolex Casio)
• Firms may decide to take no action when, the other firm is serving a different market.

Business Level Strategies

• There are four generic types: Cost Leadership, Differentiation, Cost Focus, Differentiation Focus
• Cost Leadership:(Wal-Mart) Involves generating economic value by having lower costs than competitors.
• Firms have policy choices to choose the means the intend to use in the market, that are inexpensive to produce.
• Product Differentiation: (Harley-Davidson) Generate economic value by offering a product that customers prefer.
• Managers need to understand, who has the Cost Advantage in their market.
• If it a competitor, the firm should develop a strategy to either capture the advantage or compete on some other basis.

Sources of Cost Advantage

• These include: Economies of Scale, Learning Curve Economies, and technology independent of scale.
• diseconomies of scale are an advantage for those who do not have them.

Policy Choices

• Policy choices to get to choose how they will serve the market.
• Is structured with the aim of offering level of quality that is inexpensive to produce.
• Firms can make policy choices that give people incentives to reduce cost at every opportunity.

The functional structure and cost leadership include:

• Specialization within functions facilitates cost reduction
• CEO can use this structure to ensure best cost reduction practices are shared, to to allow and encourage decision-making by those in the best positions, and that functions are coordinating efforts in pursuit of a common strategy

Organizational Structure

• 3 Types, Simple, Functional, Multidivisional Organizational Control:
• Policies intended to influence behavior by aligning the interests of the individual with the interests of the organization, whether budgets, performance, or awards.

Product Differentiation

• Increases the focal firm's perceived value for customers versus the competition. Allows for exploiting the actual Product Attributes, Firm Linkages or Firm–Customer Relationships.
• This means that the firm is is exploiting relationships with customers or within the film and with other films
• It requires uniqueness and customer preference.

Cost Leadership and Product Differentiation

• Some firms can do both, because some bases of differentiation also lend themselves to low cost, such as Toyota/Lexus as oppsed to Rolex which focuses on one.