Strategic Management: Competitive Advantage

• Strategy is a set of goal-directed actions a firm undertakes to gain and sustain competitive advantage.
• Firm performance is defined by economic value, calculated as Value minus Cost.
• Value represents the maximum amount consumers are willing to pay.
• Cost represents the producer's reservation price.
• Strategic positioning involves staking out a unique position within an industry to provide customer value while controlling costs.
• Managers must make conscious trade-offs to achieve effective strategic positioning.
• Competitive advantage stems from performing different activities or performing the same activities differently.
• Competitive advantage is superior performance relative to competitors in the same industry or the industry average.
• Sustainable competitive advantage is outperforming competitors or the industry average over a prolonged period.
• Competitive disadvantage is underperformance relative to competitors or the industry average.
• Competitive parity is when two or more firms perform at the same level.

Elements of Strategy

• Analysis involves diagnosing the competitive challenge through internal and external environment assessment.
• Formulation involves guiding policies to address challenges at business, corporate, and global strategy levels.
• Implementation is a set of coherent activities to enact the firm's guiding policy through strategy implementation.
• Each task in strategy is interdependent and can occur simultaneously.
• Industry effects describe the economic structure of the industry, determining about 20% of a firm's profitability.
• Firm effects are managerial actions that explain up to 55% of firm performance.
• Value creation for society occurs when firms compete in their self-interest while obeying laws and acting ethically.
• Companies with good strategies generate value for society by providing affordable, high-quality products or services and being profitable.
• Stakeholders contribute to a company's value creation and receive benefits in return.

Stakeholders Contributions and Benefits

• Employees contribute time and talents in exchange for wages and perks.
• Shareholders provide capital and expect increases in stock price and dividends.
• Communities offer real estate, infrastructure, and public safety support in exchange for taxes and employment.
• External stakeholders include customers, suppliers, alliance partners, creditors, unions, government, and communities.
• Internal stakeholders include employees, stockholders, and board members.
• Stakeholder strategy is an integrative approach to managing stakeholders to gain and sustain competitive advantage.
• A single-minded focus on shareholders alone exposes a firm to undue risks.
• Proactively shaping exchange relationships with stakeholders maximizes joint value and manages fair distribution.
• Assessment of stakeholder strategy involves managers caring about public reputation, quantified and assessed by organizations.
• Stakeholder impact analysis is a decision tool to recognize, prioritize, and address stakeholder needs; has a five-step process.

Stakeholder Attributes

• Power: ability to influence the company.
• Legitimacy: validity of the claim.
• Urgency: need for immediate attention.

Steps to Stakeholder Analysis

• Identify stakeholders and their needs.
• Identify stakeholder interests.
• Identify opportunities and threats.
• Identify social responsibilities through Corporate Social Responsibility (CSR). CSR includes economic, legal, ethical, and philanthropic expectations.

Analyzing the External Environment

• Analyzing the external environment allows managers to mitigate threats and leverage opportunities.
• It allows managers to gain understanding of potential impacts and the proximity of factors.
• Key factors: political, economic, sociocultural, technological, ecological, and legal.

Macro Environment Factors

• Political factors result from government processes and actions.
• Firms shape this aspect through lobbying, public relations, contributions, and litigation.
• Economic factors are largely macroeconomic and are: growth rates, employment levels, interest rates, price stability, and currency exchange rates.
• Sociocultural factors include society's cultures, norms, and values, which are constantly in flux and differ across groups.
• Demographic trends predict opportunities and threats related to population characteristics and consumer preferences.
• Technological factors involve innovations in process and product technology.
• Ecological factors involve environmental issues like natural environment, global warming, and sustainable economic growth.
• Legal factors are official outcomes of political processes in the form of laws, mandates, regulations, and court decisions.

Industry Analysis

• Industry: group of incumbent companies with similar suppliers, buyers, products, and services.
• SCP (Structure-Conduct-Performance) paradigm examines industry structure, conduct, and performance. Key saying, "..industry that keeps its reputation intact."

Threat of Entry

• Potential competitors entering an industry is a threat.
• Entry can lower profit potential, leading incumbents to lower prices and increase spending.
• Entry barriers obstruct others from entering, predicting industry profit potential.

Types of Entry Barriers

• Economies of scale
• Network effects (e.g., night clubs and Facebook)
• Customer switching costs (e.g., SAP ↔ Oracle)
• Capital requirements
• Government policy (e.g., license)
• Credible threat of retaliation
• Other advantages related to size, brand loyalty, proprietary technology, access to resources/channels, geographic locations, learning/experience.

Power of Suppliers

• Suppliers pressuring industry profit potential by demanding higher prices and/or reducing quality.
• High supplier power occurs when they are not dependent on the industry, are concentrated, and/or can forward-integrate.

Power of Buyers

• Customers demanding lower prices or higher product quality.
• High buyer power occurs when there are few buyers who purchase large quantities or the industry's products are standardized.

Threat of Substitutes

• Products or services outside an industry meeting the needs of current customers.

Rivalry Among Competitors

• The intensity with which companies jockey for market share, determined by industry structure, growth, strategic commitments and exit barriers.

Aspects of Competitive Industry Structure

• Number and size of competitors.
• Firms' degree of pricing power.
• Type of product/service (commodity or differentiated product).
• Height of entry barriers.
• Examples include perfect competition, monopolistic competition, oligopoly, and monopoly.

Industry Growth

• High growth results in decreased price competition due to more consumer demand.
• Negative growth results in fierce rivalry as rivals can only gain at the expense of one another.

Strategic Commitments

• Firm actions that are costly, long-term oriented, and difficult to reverse.
• Obstacles that determine how easily a firm can leave (i.e. contractual/emotional obligations).

Sixth Force

• Complements are a product, service, or competency that adds value when used with the original product.

Industry Dynamics

• Leaders monitor info about industry speed and rate of innovation.
• Consolidated industries are more profitable, facilitated by mergers and acquisitions.
• Industry convergence occurs when unrelated industries satisfy the same need.

Strategic Groups

• A set of companies that pursue a similar strategy in a specific industry.
• Dimensions used include R&D expenditures, product differentiation, pricing, market segments, distribution channels, etc..
• Creating a strategic group map involves identifying important strategic dimensions and graphing firms based on those dimensions.
• Insights include: strongest competitive rivalry is in the same group, external environment affects each group differently, profitability by group is different. Also, the 5 competitive forces are variable for each group.
• Mobility barrier: industry specific factors (brand histories and stories) that separate strategic group. Is an industry specific barrier.

Core Competencies

• Unique strengths embedded deep within a firm, allowing differentiation of products and services at lower costs.
• They are critical to understanding core competencies.
• Any assets that a firm can draw on when formulating and implementing a strategy.

Resource-Based View (RBV)

• Views a firm as a bundle of resources.
• Explains performance differences based on resource differences.
• Two critical assumptions: resource heterogeneity and immobility.

Heterogeneity & Immobility

• Heterogeneity: firms have different resources and capabilities.
• Immobility: resources tend to be "sticky" and do not move easily from firm to firm.

Types of Resources

• Tangible & intangible.
• Intangible resources often are importnant.
• Tobin's Q: is the market value of firm / replacement cost of assets.

VRIO Decision Tool

• Tool to see if a resource can be core competency.
• Requires resource to be Valuable, Rare, Costly to Imitate, and Organized to capture value.

Isolating Mechanisms

• Barriers to imitation that protect resources, capabilities, or competencies that underlie a firm's competitive advantage.

Value Chain

• Internal activities a firm engages in when transforming inputs into outputs.
• Activities add incremental value directly or indirectly.
• Primary activities directly add value.
• Support activities add value indirectly.

Dynamic Capabilities

• A firm's ability to purposefully create, extend, or modify its resource base.
• Helps prevent core rigidity as environment changes.
• Bathtub metaphor: resource stock and flows. Resource stocks are intangible resources, which is represented by amount of water in the bathtub. The water is built up through investments over time, and leakage + forgetting diminishes it.

Business-Level Strategies

• Align the firm's internal strengths with its external opportunities.
• Make all activities along the value chain aligned with the strategic position.
• Involves goal-directed actions managers take to achieve competitive advantage in a single product market.
• Concerned with strategic trade-offs between a cost position and a value position to maximize economic value creation.
• Firms need to maximize value creation while minimizing cost. Higher value usually comes with higher cost.

Generic Strategies

• Can apply to different firms in different contexts.
• Differentiation: creates higher value than competitors by offering unique features; firms keep their costs as low as possible & charge higher prices.
• Cost leadership: provides products or services at lower cost than competitors, similarly valued & with lower prices.

Focused Business Strategies

• Whether to focus on a narrower or broader market segment and distribution channel i.e. focused differentiation and focused cost leadership.

Three Drivers That Increase Value

• Product features increase perceived value.
• Customer service increases perceived value.
• Complements increase perceived value and are consumed in tandem.

Four Cost Drivers

• Lower prices,
• Input factors,
• Economies of scale combine product lines, routines that embrace knowledge and specialization.

Overcoming Drawbacks

• Learning curve effects are performance differentials tend to be larger in industries with higher learning curve effects and can also be serve as entry barriers.
• Experience curve effects happen when technology changes while output is constant and offers lower prices than competitors.

Stuck in the Middle

• Combination of cost leadership and differentiation often is unsuccessful.
• With Dual Strategy, businesses need to develop a coherent way to manage trades-offs, requiring significant managerial innovation.

Blue Ocean Strategy

• Combines differentiation and cost-leadership activities; a guide for the dual-value strategy.
• The value innovation reconciles trade-offs.
• To achieve a successful strategy, you must lower costs via eliminating/reducing the factors the industry takes for granted.
• Then you must raise perceived consumer benefits by raising factors above the industry's standard and creating factors that have never been offered.

Innovation

• Dominant positions can quickly change due to innovation and can be a powerful strategic weapon to gain and sustain competitive advantage.
• Process: idea → invention → innovation → imitation.
• Idea- abstract concepts or research findings.

Phases of Innovation

• Invention transforms the product and modifies recombinations. Its commercialization for entrepreneurs.
• Imitation copies successful innovation.

Entrepreneurship

• Economic risk taking to innovate.
• Results in new products, processes, organizations.
• Agents introduce change.

Types of Entrepreneurship

• Strategic: pursuit of innovation using strategic management tools.
• Social: pursuit of social goals.

Innovation & Industry Lifecycle Changes

• Industries change as they age and each stage requires different competencies.
• Core competency: R&D
• Strategic objective: market acceptance and future growth (initiate and leverage network effects to achieve these objectives)
• Emphasis: uniqueness and performance
• Capital-intensive: trying new ideas, producing small quantities

Growth Phase of Lifecycle

• Demand increases rapidly.
• Product/service standards emerge as a dominant design.

Shakeout Phase of Lifecycle

• Firms compete more intensely, resulting in incumbents consolidation, and the main competitive weapon is low pricing.

Maturity Phase of Lifecycle

• Few large firms remains and additional market demand is limited.

Decline Phase of Lifecycle

• Demand falls and there is pressure of low prices. There are four strategic options of bankruptcy, harvesting (reduce investments), maintaining support, or consolidate.

Categories of Technology Adopters

• Technology enthusiasts- 2.5% of the potential market. Have an engineering mind and are proactive.
• Early adopters adopt 13.5% of the market. Driven by intuition, create new business.
• Early majority- 34% of the market. Very practical. Key to catch in order to have growth wave.
• Late majority- 34% of the market. Not a confident and prefer the norm.
• Laggards- 16% of the market.

Sustaining Innovation

• Occurs when a company improves the performance of existing products to offer greater value to current customers. Its motivation is to higher profit margins.
• Low-end technology eventually meets the need of the mass market, and ends up being disruptive.
• Incumbents don't want to cannibalize revenues from the current tech.

Types of Innovation

• Product innovation is embodied in the outputs of an organization.
• Process innovation innovates the way an organization conducts its can enable one another.

Radical Innovation

• Varies in its degree to new and different and from previously existing products (relative).

S-curves describe a technology's rate of improvement and the rate of diffusion to the market.

Types of Innovation

• Competence-enhancing builds on the firm's existing knowledge base.
• Competence-destroying renders the firm's existing competencies obsolete.
• Architectural changes the system's overall design.

Open Innovation

• Encourages innovation and ideas to can originate from external sources.
• Internally developed techs can be commercialized outside (license, partnership, sales, spin-offs.)
• Open Innovation increases supply and mobility of skilled workers, exponential growth of venture capital, commercialization options, increasing capabilities of suppliers.