Strategic Management Notes PDF

3/10 Chapter 1. What is Strategy? Strategy- a set of goal directed actions a firm takes to gain and sustain competitive advantage Firm performance- defined by economic value(Value-cost) is created Value=Max(consumers willing to pay) Cost=Min(producer’s reservation price) Strategic positioning:...

3/10 Chapter 1. What is Strategy? Strategy- a set of goal directed actions a firm takes to gain and sustain competitive advantage Firm performance- defined by economic value(Value-cost) is created Value=Max(consumers willing to pay) Cost=Min(producer’s reservation price) Strategic positioning: -​ Stake out a unique position within an industry to provide value to customers, while controlling costs -​ Managers must make conscious trade-offs Competitive advantage has to come from: -​ performing different activities -​ performing same activities differently Competitive advantage -​ Superior performance relative to other competitors in the same industry or the industry average Sustainable competitive advantage -​ Outperforming competitors or the industry average over a prolonged period of time Competitive disadvantage -​ Underperformance relative to -”- Competitive parity -​ Performance of two or more firms at the same level Elements of strategy -​ Analysis: Diagnosis of the competitive challenge – Accomplished through strategy analysis off the firm’s internal and external environment -​ Formulation: Guiding policy to address the competitive challenge at different levels such as business, corporate, and global strategies – Accomplished through strategy formulation, resulting in the firm’s corporate, business, and functional strategy -​ Implementation A set of coherent activities to implement the firm’s guiding policy – Accomplished through strategy implementation Industry effects: describe the underlying economic structure of the industry(determined by elements common to all industries)- 20% of a firm’s profitability depends on the industry Firm effects: firm performance is attributed to managerial actions (firm’s strategy can explain up to 55% of performance) Value creation for Society -​ FIrms basically compete in their own self-interest, but as long as obeying the law and acting ethically, companies with good strategy generate value for society – Provide high-quality or innovative products or services at an affordable price – Make a profit that goes to investors – Employ people – Pay taxes External stakeholders: Customers, suppliers, alliance partners, creditors, unions, communities, government, media Internal stakeholders: Employees, stockholders, board members Stakeholder strategy: -​ An integrative approach to managing stakeholders in order to gain and sustain competitive advantage  -​ A single-minded focus on shareholders alone exposes a firm to undue risks -​ Proactively shaping the complex web of exchange relationships with stakeholders to max joint value created and manage the distribution ina fair and transparent manner Assessment of stakeholder strategy -​ Managers care about public reputation, which is a collective outcome of their stakeholder strategy -​ Public reputation about a firm’s stakeholder strategy is quantified and assessed by many organizations(Fortune”World’s most admired companies”: 2020- Apple, Amazon, MS, Disney, Berkshire Hathaway) Stakeholder impact analysis: -​ A decision tool to help managers recognize, prioritize, and address stakeholder needs -​ A five-step process recognizing stakeholders’ claims -​ Stakeholder attributes: – Power: power over company – Legitimacy: legitimate claim – Urgency: urgent claim when it requires a company’s immediate attention Step 1: Identify stakeholders -​ Identify powerful stakeholders and their needs -​ Primary(investors, employees, customers, suppliers, community), Secondary(NGO, government, special interest groups etc.) Step 2: Identify stakeholder interests Step 3: Identify opportunities and threats -​ Stakeholders’ pressure can be a credible threat, but threat and opportunity is two sides of a coin Step 4: Identify social responsibilities -​ CSR: a framework to recognize and address economic, legal, social, and philanthropic expectations  -​ Normative conflict with secondary stakeholders can pose institutional pressure on firms 3/11 Chapter 3. External Analysis: Industry structure, competitive forces, and Strategic Groups Importance of Analyzing the external environment -​ Managers can mitigate threats -​ Managers can leverage opportunities -​ Gain understanding of potential impacts -​ Understand the source/proximity of factors Political– Economic– Sociocultural– Technological– Ecological– Legal inwards- more relevant, easier to control outwards- less relevant,harder to control Political Factors -​ Political factors result from the processes and actions of government bodies -​ Firms can shape this factor through:– Lobbying– Public Relations– Contributions– Litigation Economic Factors -​ Largely macro-economic -​ Examples include:– Growth rates (adjusted for inflation) – Levels of employment– Interest rates (adjusted for inflation)– Price stability (inflation or deflation)– Currency exchange rate Sociocultural Factors -​ Society’s cultures, norms, and values– Are constantly in flux– Differ across groups  -​ Demographic trends(very predictable)– Present opportunities and threats– Population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class -​ Consumer’s preferences Technological Factors -​ Innovations in process technology:– Lean manufacturing, Six Sigma quality, and biotechnology– More recently, 3D printing, smart manufacturing, and nanotechnology -​ Innovations in product technology:– Smartphones, computer tablets, and high-performing electric cars such as the Tesla Model S Impact: process innovation> product innovation Ecological Factors -​ Involve environmental issues, such as:– Natural environment– Global warming– Sustainable economic growth Legal Factors -​ Official outcomes of political processes:– Laws– Mandates– Regulations– Court decisions -​ Industry deregulations(ex. 민영화) have affected multiple industries:– Airlines, telecom, energy, and trucking Industry Analysis -​ What does industry mean?– Industry: Group of incumbent companies Relatively the same set of suppliers and buyers Tend to offer similar products and services -​ However, the definition of industry can be fuzzy (can be broad or narrow) -​ SCP paradigm: Structure-> Conduct-> Performance paradigm -​ “When an industry with a reputation for difficult economies meets a manager with a reputation for excellence, it’s usually the industry that keeps its reputation intact” --- by Warren Buffet Threat of entry -​ The risk that potential competitors will enter an industry -​ Lowers industry profit potential by– Leading incumbents to lower prices– Increasing incumbents’ spending to satisfy existing customers -​ Entry barriers:– Obstacles blocking others from entering– A significant predictor of industry profit potential 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 less related to size– Brand loyalty, proprietary technology, preferential access to raw materials and distribution channels, favorable geographic locations, and cumulative learning and experience effects Power of Suppliers -​ Pressures that industry suppliers can exert on an industry’s profit potential -​ Lowers industry profit potential if:– Suppliers demand higher prices for their inputs– Suppliers reduce quality Bargaining Power of Suppliers Is High When: Suppliers not dependent on industry for majority of revenue Concentrated (or limited) supplier industry Incumbent firms face supplier switching costs Suppliers offer differentiated products There are no supplier substitutes. Suppliers can forward-integrate into the industry.(suppliers enter the industry) Bargaining power of Buyers -​ Pressure customers put on an industry by demanding:– A lower price or – Higher product quality Bargaining Power of Buyers Is High When: There are a few buyers & each buyer purchases large quantities. The industry’s products are standardized or undifferentiated commodities. Buyers face low or no switching costs. Buyers can backward-integrate into the industry Threat of substitutes -​ Products or services outside an industry meeting the needs of current customers Rivalry among competitors -​ The intensity with which companies in the same industry jockey for market share and profitability (Some rivalry are good for industry profitability) -​ The stronger the other forces, the higher the intensity -​ Mainly determined by: – Competitive industry structure – Industry growth – Strategic commitments – Exit barriers Competitive industry structure -​ The number and size of competitors -​ The firms’ degree of pricing power -​ The type of product or service (commodity or differentiated product) -​ The height of entry barriers -​ Perfect competition, monopolistic competition, oligopoly, monopoly(natural, near) Industry growth -​ High growth: consumer demand rises, price competition decreases (focus on new customers) -​ Negative growth: rivalry is fierce, rivals can only gain at the expense of one another Strategic commitments -​ Firm actions that are: costly, long-term oriented, difficult to reverse Exit barriers -​ Obstacles that determine how easily a firm can leave(contractual obligations, emotional attachments etc.) Sixth force: complements  -​ a product, service, or competency that adds value when used with the original product Industry dynamics -​ Leaders need info about: changing speed of an industry, rate of innovation Industry consolidation -​ Consolidated industries are more profitable -​ Mergers and acquisitions make this possible Industry convergence -​ When unrelated industries satisfy the same need “big blur” -​ Cable TV & telecommunications, FIntech providing traditional banking Strategic groups -​ A set of companies that pursue a similar strategy in a specific industry -​ The framework: clusters different firms into groups based on key strategic dimensions -​ R&D expenditures, tech, product differentiation, product and service offerings, pricing, market segments distribution channels, customer service Creating a strategic group map 1.​ Identify important strategic dimensions 2.​ Choose two key dimensions – For horizontal and vertical axes – Not highly correlated 3.​ Graph the firms in the strategic group – Market share indicated by the size of the bubble Insights from strategic group mapping 1.​ Competitive rivalry: strongest in the same group 2.​ External environment: affects each group differently 3.​ Five competitive forces: -”- 4.​ Profitability: some groups are profitable than others Mobility barrier -​ Industry specific factors (brand histories and stories) -​ Separate one strategic group from another Chapter 4. Internal Analysis: Resources, Capabilities, and Core Competencies Core competencies: Unique strengths embedded deep within a firm -​ Allow a firm to differentiate its products and services by resulting in higher value or lower cost -​ Important to understand the invisible part of core competencies - IKEA: Superior ability to design modern functional home furnishings at low cost -​ Facebook: Superior algorithms to offer targeted online ads Resources: Any assets that a firm can draw on when formulating and implementing a strategy Resource based view (RBV): -​ A paradigm that 1) views a firm as a bundle of resources and 2) explains firm performance differentials based on the differences of firm resources -​ Two critical assumptions of RBV – Resource Heterogeneity: A firm is a bundle of resources and capabilities that differ across firms – Resource Immobility: A firm has resources that tend to be “sticky” and that do not move easily from firm to firm Tangible & Intangible: -​ Intangible resources have become important -​ Tobin’s Q= market value of firm/ replacement cost of assets The VRIO decision tree: if it meets it’s core competency Valuable: if it increases economic value creation Rare: if only few firms possess it Organized: if it has an effective organizational structure and coordinating Capabilities: Organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically Activities: Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services Isolating mechanisms: Barriers to imitation that protect resources, capabilities, or competencies that underlie a firm’s competitive 1.​ Better expectations of future resource value 2.​ Path dependence -​ Hard to duplicate because of all that has happened along the path followed in the development and/or accumulation of resources over a long period of time 3.​ Causal ambiguity -​ Impossible to explain what caused a resource to exist or how to recreate it 4.​ Social complexity -​ Resources that result from social engineering such as interpersonal relations and culture 5.​ Intellectual property(IP) protection Value chain -​ Internal activities a firm engages in when transforming inputs into outputs -​ Each activity adds incremental value – Primary activities directly add value – Support activities add value indirectly Primary activities -​ Firm activities that add value directly -​ Transform inputs into outputs as the firm moves a product or service horizontally along the internal value chain (supply chain management, operations, distribution, marketing and sales, after-sales service etc.) Support activities  -​ Firm activities that add value indirectly -​ Necessary to sustain primary activities (r&d, info systems, HR, Accounting and finance, Firm infrastructures) Dynamic capabilities -​ A firm’s ability to: purposefully create, extend or modify its resource base -​ Helps prevent a core rigidity: former core competency that turned into a liability as the environment changed The bathtub metaphor: resource stock and flows -​ Resource stocks: company’s current level of intangible resources, which is represented in the drawing by the amount of water in the bathtub -​ Inflows: Intangible resource stocks are built through investments over time. -​ Outflows: reduction- leaking and forgetting(employee turnover etc.) Second-order Competencies -​ First-order vs. Second-order Competences – First-order: a firm’s capacity in carrying out current tasks, related to serving its current customers – Second-order: a firm’s capacity in learning new tasks that is not specific to a certain domain of knowledge, relate to re-creating and deploying those first-order skills to new markets and customers How to develop 2nd-order competences and dynamic capabilities -​ Experience accumulation in operating current organizational routines provides baseline, but does not ensure the development of these higher-order capabilities -​ Deliberate investments in knowledge articulation and codification are required to facilitate the development of these higher-order capabilities – Articulation of implicit knowledge through collective discussions, debriefing sessions, and performance evaluation processes helps explicate the causal linkages between actions and outcomes  – Codification in written tools such as manuals, blueprints, spreadsheets, decision support systems, project management software, and etc. further clarifies the causal linkages between actions and outcomes Chapter 6. Business Differentiation, Cost leadership, and Blue Oceans Strategic fit: align the firm’s internal strengths with its external opportunities Strategic coherence: make all activities along the value chain aligned with the strategic position Business level strategy -​ Goal-directed actions managers take to achieve competitive advantage in a single product market -​ Concerned mainly with dealing with the strategic trade-offs between a cost position and a value position to maximize the firm’s economic value creation – Firms need to maximize value creation while minimizing cost to maximize economic value creation – However, higher value usually comes with higher cost Generic business strategies -​ These strategies are generic in the sense that they can apply to many different firms in many different contexts -​ Differentiation – Seeks to create higher value than competitors – Offers products or services with unique features – Keeps the firm’s cost structure as low as possible – Charges higher prices -​ Cost leadership – Seeks to provide products or services at lower cost than competitors – Creates similar value compared to competitors – Charges lower prices Focused Business Strategies -​ Whether to focus on a narrower or broader market segment and distribution channel -​ Focused differentiation -​ Focused cost leadership(ikea, geico) Differentiation strategy -​ Pursue unique features that increase value of goods and services and thus make consumers willing to pay a higher price -​ The focus of competition: unique product features, service, new product launches, marketing and promotion, optimizing the value chain to achieve high value -​ Fails if your differentiating points increase only costs but not perceived value to customers -​ Add value to products and services -​ Are responsive to customer preferences -​ Can increase costs(r&d, innovation, customers willing to pay premium) Three drivers that can increase value -​ Product features: increases perceived value, turns commodity into differentiated, strong R&D needed -​ Customer service: increases perceived value -​ Complements: increases perceived value, consumed in tandem Cost leadership strategy -​ Focus of competition: – Reducing cost to manufacture a product or to offer a service – Reducing prices for customers – Optimizing the value chain to achieve low cost -​ Fails when products or services are cheaper but do not provide adequate value Four cost drivers that help keep costs low -​ Cost of input factors: RM, capital, labor, IT -​ Economies of scale: combine 2+ product lines, succession of products or markets, routines that embrace knowledge gained over time – allows to: employ specialized systems and equipment, take advantage of certain physical properties  -​ Learning curve effects: – performance differentials tend to be larger in industries with higher learning curve effects – can also serve as an entry barriers – do not necessarily exist in your industry -​ Experience curve effects: when technology is changed while output is constant(a new production process, implementing lean manufacturing etc) -​ Appeal to the bargain-conscious buyer -​ Offer lower prices than competitors -​ Attract an increased volumes of sales -​ Can be profitable over a long period of time Stuck in the middle -​ A combination of cost leadership and differentiation is usually unsuccessful -​ Many industries already have established cost leaders and differentiation, new companies are forces to pursue dual strategy to survive and thrive -​ To successfully pursue the dual strategy, firms need to develop a coherent way to manage the trade-offs often requires a fundamentally different business model significant managerial innovation Blue ocean strategy -​ A guide for successfully combining differentiation and cost-leadership activities -​ Uses value innovation to reconcile trade-offs -​ Blue ocean: untapped market space, the creation of additional demand, the opportunity for highly profitable growth To achieve successful value innovation, answer these questions -​ Lowering costs – Eliminate: which of the factors that the industry takes for granted should be eliminated? – Reduce: which of the factors should be reduced well below the industry’s standard? -​ Increasing perceived consumer benefits – Raise: which of the factors should be raised well above the industry’s standard? – Create: which factors should be created that the industry has never offered? -​ IKEA – Eliminate: sales people, after sales service – Reduce: warranties – Raise: offers tens of thousands of home furnishing items – Create: new way to shop for furniture Chapter 7. Business strategy: Innovation and entrepreneurship Dominant positions can quickly change due to innovation -​ Traditional networks vs. cable providers -​ Cable providers vs. streaming content -​ Typewriters to PC’s to mobile devices -​ Innovation can be a powerful strategic weapon to gain and sustain competitive advantage Idea, invention, innovation, and imitation -​ Innovation process: idea→ invention→ innovation→ imitation -​ Idea: abstract concepts or research findings  -​ Invention – Transformation of an idea into product or process – The modification and recombination of existing ones -​ Innovation: commercialization of an invention by entrepreneurs -​ Imitation: copying a successful innovation Entrepreneurship -​ Undertake economic risk to innovative – Results in new products, processes and organizations -​ Entrepreneurs are agents who introduce change Strategic entrepreneurship -​ The pursuit of innovation using tools and concepts from strategic management -​ Fundamental question is – How to combine entrepreneurial actions – How to create new opportunities – How to exploit existing opportunity – … in the pursuit of competitive advantage Social entrepreneurship -​ The pursuit of social goals -​ Creation of a profitable business Innovation can lead to new industries -​ IT and Logistics: – Created overnight express deliveries (FedEx) – Created big-box retailing (Walmart) -​ The internet: – Online retailing (Amazon & eBay) – Revolutionized advertising (Yahoo, Google, Facebook) The five phases of an industry life cycle -​ Supply and demand changes as industries age -​ Each stage requires different competencies 1.​ Introduction – Core competency: R&D – Strategic objective: market acceptance & future growth (initiate and leverage network effects to achieve these objectives) – Emphasis: uniqueness & performance – Capital-intensive: trying new ideas, producing small quantities – Initial market size: small – Growth: slow – Barriers to entry: high Network effects 2.​ Growth – Demand increases rapidly: first-time buyers rush to purchase, proof of concept completed – Competitive rivalry: muted (due to growth) – Product/ service standards (dominant design) emerge – Basis of competition: process innovation – Core competencies: manufacturing, marketing 3.​ Shakeout – Firms begin to compete more intensely: weaker firms forced out, the industry consolidates, only the strongest competitors survive – Biggest competitive weapon: low price 4.​ Maturity – Few large firms remain: they enjoy economies of scale – Additional market demand is limited – Market has reached maximum size – Competitive intensity: increases 5.​ Decline – Demand falls, often rapidly – Strong pressure on prices  – Four strategic options to pursue: 1.​ Exit: bankruptcy / liquidation 2.​ Harvest: reduce further investments 3.​ Maintain: support at a given level 4.​ Consolidate: buy rivals Crossing the chasm: Many innovators do not successfully transition from one stage of the industry life cycle to the next Technology enthusiasts: -​ 2.5% of the total market potential -​ Often have an engineering mind -​ Pursue new technology proactively -​ Enjoy using beta versions  -​ Tinker with the product’s imperfections: often provide (free) feedback and suggestions Early adopters: -​ 13.5% of the total market potential -​ Demand is driven by: imagination and creativity, intuition and imagination, “what can this new product do for me/my business?” -​ Firm needs to communicate the product’s potential applications in a more direct way Early majority: -​ 34% of the total market potential -​ Main consideration: “Is this practical?” -​ Weigh the benefits and costs carefully -​ Observe early adopters using the product: rely on endorsements -​ This group is key to catching the growth wave Late majority -​ 34% of the total market potential -​ Not as confident in their ability to master the technology -​ Prefer to wait until standards have emerged -​ Prefer to buy from well-established firms Laggards -​ 16% of total market potential -​ Adopt a new product only if necessary -​ Generally don’t want new technology -​ Typically not pursued as future customers -​ Their demand is small Caveat: -​ Industries do not necessarily evolve through these stages -​ Some may never go through the entire life cycle, while others are continually renewed through innovation Disruptive innovation -​ Video streaming→ cables and dvd rental -​ transistors→ vacuum tubes -​ Steel mini mills→ integrated steel companies -​ Characteristics required to be defined as disruptive innovation – The performance is poorer than the incumbent technology – But 1) it is much cheaper or 2) it provides new convenience – Technologies improve faster than customers require Outcome: This low-end technology eventually meets the needs of the mass market and as a result disrupt the incumbent technology Continued disruption: -​ Incumbents tend to overshoot the current customer demands in advancing their current technologies -​ Incumbents tend to ignore low-end markets while focusing on the high-end markets while focusing on the high-end markets where they can charge high margins→ miss the signals of disruptive tech -​ Incumbents do not want to cannibalize their revenues from the current technologies Sustaining innovation -​ Occurs when a company improves the performance of existing products to offer greater value to current customers -​ The motivation behind sustaining innovation is to obtain higher profit margins by satisfying the most demanding high-end customers  -​ In many cases, the performance of sustaining innovation is advances at a faster pace than high-end market customers want, which results in overshooting Types of innovation -​ Product innovation: embodied in the outputs of an organization -​ Process innovation: innovations in the way an organization conducts its -​ Can enable one another -​ Product innovation for one company can be process innovation for other (UPS- new distribution service→ process innovation for customers) -​ Radical innovation: degree to which it is new and different from previously existing products and processes (relative) -​ Incremental innovation: may involve only minor change from(or adjustment to) existing practices – Economic incentives: Established companies are focused on defending their position – Organizational inertia: Established companies rely on formalized business processes and structure – Innovation ecosystem: established companies are part of an ecosystem (suppliers, buyers, competitors)  -​ Competence-enhancing: build on the firm’s existing knowledge base -​ Competence-destroying: render a firm’s existing competencies obsolete -​ Depends on perspective of a particular firm -​ Architectural: changing the overall design of the system or the way components interact(mostly require changes in the underlying components also) -​ Component: changes to one or more components of a products system without significantly affecting the overall design Technology S-Curves -​ The rate of a technology’s improvement as well as its rate of diffusion to the market typically follow s-shaped curve -​ Technology improves slowly at first← poorly understood -​ Then accelerates as understanding increases -​ Then tapers off as approaches limits -​ Technology do not always get to reach their limits and may be displaced by new, discontinuous tech – A discontinuous tech fulfills a similar market need by means of an entirely new knowledge base – Tech discontinuity may initially have lower performance than incumbent tech (first automobiles were slower than horse carriages) -​ Firms may be reluctant to adopt new technologies 1) improvement is slow and costly 2) investment in incumbent tech S-curves as a prescriptive tool -​ Managers can use data on investment and performance of their own tech or data on overall industry investment and tech performance to map s-curve -​ Useful for gaining deeper understanding of its rate of improvement or limits – True limits of tech may be unknown – Shape of s-curve can be influenced by market changes, component techs, complementary techs  – Following s-curve too closely could end up switching techs too soon or too late Closed innovation: new techs are discovered, developed, commercialized internally Open innovation -​ Ideas and innovation can originate from external sources(start-ups, competitors, unis, suppliers, and customers) -​ Internally developed techs can be commercialized outside (license, partnership, sales, spin-offs) Limits of closed industrial R&D -​ In the past – Legendary industrial labs emerged – Virtuous cycle started: cutting-edge R&D → monopolistic rents → more investments in internal R&D -​ In the present – R&D costs have been surging ← techs getting complex, firms required to combine techs – New techs become obsolete easily  -​ Inherent(natural, unavoidable) tension between R&D in Closed innovation – Research: exploration of new frontiers, new insights and discoveries – Development: application of the output of research as an input into the dev process What enables the shift from closed to open innovation -​ Increasing supply and mobility of skilled workers -​ Exponential growth of venture capital -​ Availability of options to commercialize ideas -​ Increasing capability of suppliers globally Role of internal R&D: Absorptive capacity -​ Absorptive capacity: Ability to recognize the value of new info, assimilate it, and apply it to commercial ends, which is developed only via internal R&D -​ The effects of external R&D on innovation performance