Strategy Exam 1 Review: Key Concepts

Review Session for Exam 1 (Week 6)

• Strategy, Spring 2025
• February 27, 2025
• Content is not exhaustive for Exam 1; refer to the exam guideline for coverage.

Overview of Key Topics

• What is strategy/strategic leadership?
• External analysis
• Internal analysis

What is Strategy/Strategic Leadership?

• What is strategy?
• AFI framework
• Honda mini case
• Vision, mission, values
• Mini case: Tinder & Bumble

External Analysis

• PESTEL
• Porter's five forces
• Strategic group analysis
• Mini case: Robinhood

Internal Analysis

• Resources, capabilities, and core competencies
• Resource-based view
• VRIO framework
• Dynamic capabilities
• SWOT analysis
• Trader Joe's case

Strategy Definitions

• Strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors as stated by Rothaermel. 
• Strategy is a plan, method, or series of actions designed to achieve a specific goal or effect per the Wordsmyth Dictionary.
• Strategy is the determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals as defined by Alfred Chandler.
• Strategy is the pattern of objectives, purposes, or goals and the main policies and plans for achieving these goals, stated to define what business it is or is to be according to Kenneth Andrews.

Competitive Advantage

• Competitive advantage is always relative, not absolute
• To assess competitive advantage, firm performance must be compared to a benchmark
• A firm achieves superior performance relative to other competitors in the same industry or the industry average has a competitive advantage

Stakeholder Strategy

• Stakeholder strategy is an integrative approach to managing diverse stakeholders effectively to gain and sustain competitive advantage.
• External stakeholders include customers, suppliers, alliance partners, creditors, unions, communities, governments, and media.
• Internal stakeholders include employees, stockholders, and board members.

The AFI Strategy Framework:

• Analysis, Formulation, and Implementation are the three broad tasks in the AFI strategy framework that help firms conceive of and implement a strategy that can improve performance and result in competitive advantage.

Analysis

• A diagnosis of the competitive challenge that includes strategic goals setting (vision, mission, values, objectives).
• Involves analyzing the internal and external environment of the firm.

Formulation

• Guiding policy to address the competitive challenge involves determining what industries to compete in, and how to compete in those industries.
• Business strategy and a corporate strategy are formulated.

Implementation

• A set of coherent actions implement the firm's guiding policy by allocating necessary resources.
• The organization is designed to bring intended strategies to reality.

Strategic Management Process: Top-Down

• Analysis: Includes vision, mission, and values definition, external analysis, and internal analysis.
• Formulation: Corporate strategy, business strategy, and functional strategy are formulated.
• Implementation: Structure, culture, and control mechanisms, and corporate governance and business ethics are implemented

Honda Mini-Case

• The case highlights the concepts of intended, unrealized, emergent, and realized strategies through the story of Honda.
• Intended strategy: Build US success by opening a self-dependent division and focusing on the flagship Dream and Benly models for the typical US motorcyclist
• Unrealized strategy: Self-dependence and focus was on large motorcycles
• Emergent strategy: Focused on the small Super Cub model, different target market using the US-designed "Nicest People" marketing campaign.
• Realized Strategy: Wholly-owned division with US marketers, focused on selling small motorcycles (Super Cub) to a different set of customers.

Vision, Mission, and Values

• Vision: What an organization ultimately wants to accomplish
• Vision: A future-oriented declaration of purpose and aspirations
• Mission: What an organization actually does
• Mission: Building on the vision, organizations establish what products and the markets in which it will compete.
• A company's mission is NOT to make a profit
• The real mission is "What will we do to make a profit?"
• Values: Shared principles on which a firm builds its vision and mission, setting the groundwork for long-term success.

Examples of Vision, Mission, and Values

• Apple:
  • Vision: "People with passion can change the World."
  • Mission: "Bringing the best user experience to its customers through its innovative hardware, software, and services.”
• IKEA:
  • Vision: "To create a better everyday life the many people."
  • Mission: "Offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them."
• Patagonia:
  • Vision: "A love of wild and beautiful places demands participation in the fight to save them, and to help reverse the steep decline in the overall environmental health of our planet.”
  • Mission: "We're in business to save our home planet.”
  • Values: "Our values reflect those of a business started by a band of climbers and surfers, and the minimalist style they promoted. The approach we take toward product design demonstrates a bias for simplicity and utility."

Strategy of Tinder and Bumble

• The Tinder and Bumble mini case covers the AFI framework for these dating apps
• Analysis of Swipe Based Dating App: What was the competitive challenge and guiding principles of Tinder and Bumble.

Tinder Analysis

• Traditional dating websites required lengthy personality questionnaires, resulting in less personalized and random matching results.
• Tinder was a late entrant to the online dating market in 2012.

Tinder Formulation

• To provide a fast and frictionless sign-up and personalized matching process, delivering targeted results based on users' mutual friendships and interests

Tinder Implementation

• A simplified sign-up process by linking Facebook, Google, and a mobile number.
• To personalize matching, familiar technologies and social networking are used by leveraging Facebook data, geolocation, and "swiping" function.

Bumble Analysis

• Bumble entered the market later than Tinder.

Bumble Formulation

• To create a women-centric dating app with differentiated, controlled features that are more secure, empowering its women users.

Bumble Implementation

• Women make the first move by initiating a conversation
• Bumble uses a freemium business model.

External Analysis (Week 2)

• External analysis is conducted at the macro and micro level for industry structure, competitive forces, and strategic groups.

PESTEL Analysis

-PESTEL captures external environment factors

Porter's Five Forces

• Five Forces captures Micro-level; industry factors

Strategic Group Analysis

• Strategic group analysis captures Intra-industry factors.

PESTEL

• PESTEL analysis identifies the potential specific influences of six macro, social dimensions.

Porter's Five Forces

• Porter's Five Forces helps investigate competitive dynamics within and the overall attractiveness of an industry.

Strategic Group Analysis

• Strategic group analysis aids understanding closest competitors within an industry, sharing similar sets of opportunities and threats.

Political (PESTEL)

• Processes/actions of government influencing firm decisions and behavior
• Examples include US and China's trade war, or some governments offer tax credit to purchase an electric vehicle, e.g., Virginia & Colorado offering a tax credit of $5,000 for electric vehicle purchases.

Economic (PESTEL)

• Growth rate: boom or recession determines profitability
• Interest rate: Periods of low interest rates enable firms to borrow to finance growth.
• Level of employment: low or high unemployment determines scarce resources.
• Price stability: affects demand for basic goods/services vs. luxury goods during inflation.
• Currency Exchange Rates: Crucial for firms that buy/sell products across national borders.

Sociocultural (PESTEL)

• Demographic and cultural trends determine acceptance or rejection of new/old practices.
• Health-conscious trends affect consumer decisions.

Technological (PESTEL)

• Technology-driven innovative company, electric autos, and innovative autopilot technology are examples of application of knowledge leading to new processes/products

Ecological (PESTEL)

• Concerns broad environmental issues, global warming, and sustainable economic growth
• Business actions affect air/water quality and resource depletion.
• Today, managers can no longer separate the natural and the business worlds.
• Eco-friendly technology

Legal (PESTEL)

• Existing and future regulation, codes, and taxes, can be an example
• Employment, privacy, antitrust, and health and safety law

Michael Porter's Five Forces

• Identifies an industry's profit potential(attractiveness of an industry)
• Profitability expected for the average firm

The five forces that shape competition:

• Threat of entry
• Power of suppliers
• Power of buyers
• Threat of substitutes
• Rivalry among existing competitors

Threat of New Entrants:

• Examines if significant barriers exist, new competition is unlikely, the industry is more likely to be profitable
• In other words, when little barriers to entry, incumbent firms forced to spend more satisfying customers
• Examples of threats include:
  • Significant cost of starting business (e.g., automotive industry)
  • Heavy regulation
  • Scarcity of resources, location options, licenses
  • Legal barriers (patents) (e.g., drugs)
  • Economies of scale
  • Network effects (e.g., Facebook, eBay)
  • Customer switching cost (e.g., Computer OS: Windows, Apple iOS, ...)

Power of Suppliers:

• Where suppliers are dominated by only a few, products do not have substitutes, suppliers are differentiated
• High incumbency costs
• Credible forward integration

Examples of Power of Suppliers:

• Airline industry
• The bargaining power of suppliers is high. 
• Aviation fuel & aircraft
  • Fuel: The price of aviation fuel is subject to the fluctuations in the global market for oil.
  • Aircraft: only two major suppliers; Boeing and Airbus
• Other main suppliers' powers are also strong:
  • Aircraft engines (e.g., GE, Rolls-Royce)
  • Maintenance companies(e.g., Goodrich)
  • Caterers(e.g., Marriott)

Power of Buyers:

• A few large buyers
• Products are undifferentiated Buyers face slight switching cost, or the ability to coordinate credibility.

Threat of Substitutes: Goods or Services From Outside a Given Industry

• Goods/services from outside the industry perform similar functions
• Examples: low switching cost, and how similar customers perceive viable alternatives.

High Number of Competitors (Rivalry among existing competitors)

• Industry concentration is low, the rate of growth is low, exits are high, and low differentiation between direct substitutes

Criticisms of the Framework

• It does not capture complementarity relationships, affects demand and industry profitability on five forces.
• It is Static: It also does not examine evolving industry or answer how profitability is analyzed.

Strategic Groups

• Groups of firms within the same industry sharing similar characteristics

Implications:

• Competitive rivalry is strongest between same firms.
• Affect groups differently. 
• Some are more profitable than others, with mobility barriers.

Robinhood Case Study

• The Robinhood minicase analyzes democratizing investing and investment robbing

Internal Analysis

• Resources, and Capabilities

Internal Analysis Focus

• This analysis focuses on insights into core competencies, resources, and capabilities.

Tangible Resources Include

- Financial and Physical traits that impact borrowing, raw materials, plants, equipment, land, and buildings

Intangible Resources Include

• Firm culture, Knowledge, Intellectual property, Human capital that drives Brands, customer loyalty patents, copyrights, and know-how
• Resource retention and R&D staff.

Resource-Based View

• Theorizes that a firm has resources and capabilities, defining core competency impacting strategic competitive advantage.

Key assumptions:

• Resource heterogeneity or immobility

VRIO Framework

• This framework includes the main core competencies valuable, rare, subject to implement or organize and sustainable competitive advantage

Dynamic Capabilities

- If a capability is rigid, it no longer fits in environment (core rigidities.)

Value Chain Analysis

• Is meant for specific capabilities that have value chain

SWOT Analysis

• Encompasses strengths, weaknesses, opportunities, and treats

Internal

• strengths and weaknesses

External

• opportunities and threats

• Factors like PESTEL, Five Forces & group analysis impact the chain

Case Discussion 1 (Week 4) focuses on Trader Joe's

• Examins the company and how it operates

Porter's five forces in supermarket industry

• Rivalry is high due to competition on price and little differentiation among existing competitors
• Threat of new entrants is classified as low, with consolidation and economies of scale
• Bargaining power of buyers is marked as high, since similar products/services render customers sensitive
• Bargaining power of suppliers is mostly low due to retail giants and volume purchases with retail giants
• Threat of substitutes sits as high since there are grocery sales formats (clubs, e-commerce)

Summary

• This overview covers strategy, external and internal analyses, strategic management concepts, and frameworks using cases like Honda, Tinder, Bumble, and Trader Joe's, as well as theories, and the external factors to enable businesses to plan their goals for maximum efficiency.