Strategic Management PDF

Zusammenfassung Strategic Management CHAPTER 1 Strategy: A firm’s theory about how to gain competitive advantages Perfect competition: Competition at its greatest level Hypothetical situation to compare to other market structures The strategic management process: M...

Zusammenfassung Strategic Management CHAPTER 1 Strategy: A firm’s theory about how to gain competitive advantages Perfect competition: Competition at its greatest level Hypothetical situation to compare to other market structures The strategic management process: Mission → Objectives → Internal/External Analysis → Strategic Choice → Strategy Implementation → Competitive Advantage All elements of the process are aimed at achieving competitive advantage Mission: Purpose of the company Vision: Articulation of companies desired achievements Values: Statement of how employees should conduct themselves Goal: precise and measurable desired future state Why Vision and Mission Statement? Provide basis for allocating organizational resources Establish a general tone/organizational climate Specify organisational purposes The Mission leads the strategy process Components of a Mission Statement Customers, Products, Markets, Technology, Philosophy, Self-Concept, Public Image, Concern for employees Strategic Positions can be: Traditional Product/Low-Cost positioning (Preisführer-Produkt) Objectives: should be smart (Specific, Measurable, Achievable, Relevant, and Time-Bound) External Analysis Internal Analysis Identifies strategic opportunitys and threats Focuses on reviewing resources, capabilities and Interest rates competencies of a company Demographics Human resources, manufacturing abilities, Social trends technologies External/Internal Analysis provide a base for strategic choice concerning Actions on a Business Level (positioning a business) and corporate level (which businesses) Strategic Implementation: how strategies are carried out & who will do what; just as important as strategy formulation taking action on a functional, business and corporate level to execute strategic plan feedback-loop: provides info on corporate level on strategic goals that are being achieved, degree of competitive advantage Corporate Level Managers: Oversee strategy development for entire organization Ensure business strategies pursued by company help maximize profitability and growth Business Level Managers: Translate statements of intents into concrete actions for individual businesses Functional Level Managers: responsible for specific business functions, develop functional strategies to fulfil strategic objectives Competitive Advantage: When a company’s profitability > average profitability in its industry Result of doing something better than competitors (preference for firms output/cost advantage) Zusammenfassung Strategic Management Sustained competitive Advantage: strategies that enable company to maintain above average profitability for some years Temporary Advantage: Results typically in high profits Profits attract competition Competition limits duration of competitive advantage Sustainable Advantage Competitors unable to imitate source of advantage, no better offerings Competitive Parity Firms offerings are average, people have no preference, firm has no cost advantage over others Competitive Disadvantage People have aversion to firms offering Firm has cost disadvantage firm has negative reputation Measuring Competitive Advantage: Competitive Advantage cannot be measured directly → economic performance as an indicator for sources of competitive advantage Accounting Measures: ROA, ROS, ROE Economic Measures: Earing and return in excess of cost of capital Competitive Advantage Economic returns Advantage Above normal Parity Normal Disadvantage Below normal Intended Strategies: Strategic management process leads to intended strategies Emergent Strategies: Conditions change → Intended strategies are not realized Unplanned shift in strategy, autonomous action, serendipity lead to emergent strategies which are then realized Strategy: guidelines for effective Leadership set of related actions to increase company’s performance strategic leadership: create competitive advantage through effective management of strategy making process strategic planning has a wider timeframe and focuses on the overall direction of the company; operative planning focuses on doing the things right instead of doing the right thing strategy is about discovering and exploiting defferences to create competitive advantage CHAPTER 2: Evaluating a Firms external Environment External Analysis allows: discovering threats & opportunitys Understand nature of competition Make better strategic decisions Zusammenfassung Strategic Management Should consider international markets Helps assessment of likely levels of industry profitability Opportunities: elements allowing to implement strategies to become more profitable Threats: elements could endanger firms’ profitability Sector: Group of closely related industries (Computer Sector) Industry: group of companies offering products/services that are close substitutes (Computer component industry) Market segments: Distinct customer groups (PC vs. Laptop) PESTLE Analysis: track environment a company’s operating in /planning to launch in; birds eye view over whole environment Political: extent to which government may influence (tax policies, trade tariffs..) Economic: Economy’s performance impacting (inflation rate, interest rates, Exchange rate) Social: social environment of the market (cultural trends, demographics) Technological: innovations in technology (automation, R&D) Legal: external and internal laws and policies (consumer laws, safety standards) Environmental: factors determined by surrounding environment (climate, environmental offset) Industry Analysis: Structures-Conduct-Performance Model Spot anti-competitive conditions for anti-trust purposes; assess possibilities for above normal profits Industry structure (number competing firms; homogeneity products) → firm conduct (firms strategies) → Performance Competitive Forces: Threats are high → low to normal profits; threats are low → above normal profits Threat from existing competitors: o Large numbers of competitors, fixed high costs, slow/declining growth, and low product differentiation o Rivalry among established companies: ▪ Demand conditions: Increasing demand moderates’ competition ▪ Cost conditions: fixed costs are high → profitability leveraged to sales volume ▪ Exit barriers: companies become locked into unprofitable industry Risk of Entry - Threat from new competition: o Low entry barriers → above normal profits of focal firm fade quickly o Entry barriers: ▪ Economies of scale ▪ Product differentiation ▪ Cost advantages independent of scale ▪ Government policies Zusammenfassung Strategic Management Bargaining Power of Supplies: o Powerful supplies can lower profits of focal firm by demanding higher prices Bargaining Power of Buyers: o Powerful buyers can lower profits of focal firm by demanding lower prices / higher levels of quality/service Threat of Substitutes: o Substitutes fill same need in a different way and create price ceilings because customers switch to substitutes if price rices Power of complement providers: o Companies that sell products that add value to other product of focal firm o Customers perceive more value of focal firms’ product when combined with complementors product (PC & Windows) Strategic Groups within Industries: Companies in a industry differ in the way they strategically position products in a market Positioning determined by: Product quality, distribution channels, market segments Technological leadership, customer service, Pricing, advertising, promotions Responding to environmental threats: neutralizing threats by altering relationships in industry (Companies buying rivalries, strategic partnerships.) Rivals in its own strategic group (substitutes) are immediate threat Exploiting Industry Structure Opportunities: At any time firms can choose to exploit an industry structure, continue business as usual or exit the industry Embryonic stage: Development stage with slow growth (buyers are unfamiliar with product/poor distr. channels) Entry Barriers are high, access to technological expertise is lacking First Movers bear high risk of failure No product standard reached, an no dominant firm → first mover advantages setting technological standards Growth Industry: First-time demand for new technology/product expands Prices fall because of scale economies and developing distribution channels Rivalry is low, Threat from potential new entries at highest in this stage Large number of firms with still no dominance → Consolidation (buy competitors/build market power, exploit economies of scale) Industry Shakeout: Dominant Players develop and technology standards show Demand saturates and rivalry intensifies → price war result in going out of business Mature Industries: Zusammenfassung Strategic Management Market is saturated, demand is limited to replacement demand, growth is near zero Industries consolidate into oligopols → co-existence; avoid price-wars Increasing international competition → refin current products, improve services, innovate processes to stay competitive Declining Industries: Negative Growth (technological substitution, social changes etc.) Rivalry among established companies increases Falling demand results in excess capacity → high fix costs force companies to sell Well established firms begin to exit market → niche, harvest, disinvest, market leadership CHAPTER 3 Evaluating a Firms internal Capabilities Internal Analysis: Provide comparative look at a firm’s capabilities (strength and Weaknesses) Determine if resources and capabilities are sources of competitive advantage Establish strategies that will exploit any sources of competitive advantage Distinctive competencies: Strengths (resources & capabilities) that allow a company to differentiate its products and achieve lower costs than its rivals Resources: used to conceive of and implement strategies Tangible (physical entities such as money, inventory, equipment) Intangible (nonphysical created such as brand names, company reputation) Capabilities: Company’s skills at coordination its resources and putting them to productive use Lead to sustained competitive advantage if rare and protected from copying Resource-Based View: assumes firms’ resources and capabilities are primary drivers of competitive advantage Critical Assumptions: Resource Heterogeneity (diff. companys have diff. ressources) o Occurs by bundling competitive advantages of resources and capabilities Resource Immobility (resources don’t spread from firm to firm easily) VRIO-Framework: Value: valuable resource? Does the resource result in an increase in revenue, decrease in costs? Rarity: If a resource is rare enough, perfect competition doesn’t set in and competitive advantage appears Imitability: Is the Imitation of a resource by a competing firm coupled to cost disadvantage? Zusammenfassung Strategic Management o → first mover advantages o Competitive advantage only until substitute or duplicate emerges o Causal ambiguity: causal links btw. Resources and competitive advantage may not be understood, making figuring out what to imitate harder o Social Complexity: social relationships in resources may be so complex, making it hard to replicate o → make resources as hard to copy as possible (best with intangible resources) Organization: a firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit firms resources → Advantage will be sustained if: Other firms’ costs of imitation are greater than benefit of imitation Firm is organized to exploit and further develop advantages Profitability of a company depends on: Value placed on a product Price charged for a product Cost of creating the product Strengthening the value of a product a company can → raise price to reflect value, lower price to sell more to customers There is a dynamic relationship among value, pricing, demand, and costs Competitive Dynamics – Response to strategic decisions of another firm No-Action-Response: take no action because o Firm is serving other market o Response hurts own competitive advantage o No resources or capabilites to react Change Response: specific actions (change tactics) or fundamental change (change strategy) o Imitation of product characteristics restores Parity o Permanent change id current strategy becomes obsolete CHAPTER 4: Cost Leadership Business Level Strategies: Strategic Choice on Business and Corporate Level (How to Position a Business in Market; Which Business to enter?) Cost Leadership: generate economic value by having lower costs than competitors Product Differentiation: generate economic value by offering a product that customers prefer over others Zusammenfassung Strategic Management Cost Advantage: Own company has it: develop strategy to exploit advantage Other Company: Develop strategy to capture advantage or compete on another basis Sources: Economies of Scale Results from high volumes → average cost per unit falls due to optimum use of resources Competitors may not be able to match scale of production (lacking money, newcomer) Diseconomies of Scale Advantage for smaller firms and occur when firms are too large and bureaucratic Learning Curve Economies (result of high volumes and optimization) Differential Low-Cost Access to Productive Inputs May result from: being first in market, natural endowment, locking up a source, being at the right place at the right time Technology Independent of Scale Owner of specialised technology gets advantage, degree depends on how valuable and protected it is Policy Choices Management gives people incentives to reduce cost at every opportunity Firms decide how markets will be served (quality/price of products) e.g. production efficiency and development efficiency E.g. also materials management, inventory system, SCM (locked in capital) Value of Cost Advantage: Conditions under which Source of cost advantage is LOW cost and easy to imitate: Unbalanced Industry (Low Capacity/High Demand) Non-Proprietary & High observable Tech Conditions under which Source of cost advantage is HIGH cost and hard to imitate: Zusammenfassung Strategic Management Balanced Industry Protected Technology Causal Ambiguity & Social Complexity Implementing a Cost Leadership Strategy: through structure and control Structure: o Division of management responsibilities o Establishment of reporting relationships Functional Structure (U-Form) o divides management structure by function o CEO responsible for strategy & coordination of functions, allocates resources & decides in cases of conflict o used to ensure cost reduction practices are shared among divisions & encourage decision making by those best in position to do so Multi-Divisional Structure (M-Form) o Functions replicated in every division o Makes sense when firm is involved in more than one business or divided geographically Control: o Policies intended to influence behaviour o Align interests of individual with interests of organization Management Controls o Formal (budgeting, credit, travel, purchasing policies) o Informal (culture, leadership style, attitudes) Compensation Policies o Stock options & bonuses based on cost reduction & financial performance CHAPTER 5: Product Differentiation Product differentiation strategy must meet VRIO criteria to create competitive advantage Bases of Differentiation: wide range of customer needs can be filled by wide range of bases of differentiation, that tie a customers to a product Tangible things (product features, location etc) Intangible concept (reputation, cause, ideal) Three Categories of Bases: Zusammenfassung Strategic Management Product Attributes o Product features. Complexity, timing of introduction, location Firm-Customer Relationships o Customization, Consumer Marketing, Reputation Firm Linkages o Linkages among Functions in the Firm, Linkages with other Firms, Product Mix, Distribution Channels, Service and Support Exploiting Industry-Type Opportunities: Fragmented Industry: Differentiate by Marketing Emerging Industry: First mover advantages by capturing market share Mature Industry: Refingin product/adding services Declinging Industry: Exploiting Niches By default, we assume if a product is differentiated it is rare enough to attract customer preference and increase volume of purchases and premium price If Imitators face a cost disadvantage of imitation, they will choose not to imitate. If base of differentiation is valuable, iothers will attempt to imitate it through substitution. CHAPTER 6: Business Level Strategies in Different Environments Strategies in embryonic and growth industries Limited customer demand for products of an embryonic industriy due to o Limited performance + poor quality o Customer unfamilarity Zusammenfassung Strategic Management o Poorly developed distribution channels o Lack of complementary products o High production costs Growth stage when mass market starts to devel for products o Mass market: large number of customers enter market o Occurs when: Product value increases, production costs decreases Fragmented industry Large number of small and medium sized companies Reasons for fragmentation: o Lach of scale economies o Brand loyality primary local o Low entry barriers Focus strategy works best Consolidating a fragmented industry through value innovation Value innovator: Defines value differently than established companies Chaining: Obtaining advantages of cost leadership by a network of linked merchandising outlets Franchising: Franchisor grants franchisee right to use the name, reputation and business model o In return for a fee and percentage of profit o Advantages: Rapid expansion, improve perfomance in entire system o Disadvantages: Tight control of operations not possible, major portion of profit goes to franchisee Horizontal mergers: Merging with or aquiring competitors + combining them Market Development and Customer Groups Strategic implications: crossing the chasm New strategies are requiered to strengthen a company`s business model Competitve chasm: Transition between embryonic and mass market Zusammenfassung Strategic Management Innovators and early adopters Early majority Technologically sophisticated Value ease of use and reliability Willing to tolerate limitatins of product Require mass market distribution Reached through specialized Produce high quality – low price distribution channels Produce small quantites – high priced Factors that accelerate customer demand Relative advantage: New product is perceived as better at satisfying customer needs than the previous Complexity: Perceived as complex and difficult to use Compatibility: Perceived as being consistent with current needs and existing values Trialability: Which potential can customer experiment during a hands-on trial basis Observability: Results of using and enjoying a new product can be seen be others Viral model of infection: Making others to adopt and use the product Mature industries Market totally saturated, demand limited to replacement demand, growth low or zero Barriers to entry increase Companies try to avoid price wars Exploiting industry structure opportunities Mature industry structure Industry characteristics o Slowing growth in demand o Technology standard exists o Increasing international competition o Industry-wide profits declining o Industry exit is beginning Opportunities o Refine current products o Improve service o Process innovation Strategies to Deter Entry in Mature Industries Product proliferation: Catering to the needs of all market segments to deter entry by competitors Limit price strategy: Charging a price that is lower than required to maximize profits in short run Strategic commitments: Investments that signal an incumbent`s long-term commitment to a market or a segment Strategies to manage rivalry Price signaling: Companies increase or decrease product prices to o Convey their intentions to other companies o Influence the price of an industry`s product Zusammenfassung Strategic Management Price leadership o One company assumes the responsibility for determining the pricing strategy that maximizes industry profitability Non-price competition o Use of product differentiation strategies to deter potential entrants + manage rivalry in industry Market penetration: Company concentrates on expanding market share in existing product markets Product development: Creation of new product to replace existing Market development: Search for new market segments to increase scale of existing products Product proliferation: Large companies have product in each market segment Capacity Control Strategies to control or benefit from capacity expansion products Factors causing excess capacity o New technologies that produce more than old o New entrants in industry o Economic recession → global overcapacity o High growth triggers rapid expansion Factors that determine Intensity of Competition Speed of decline Height of exit barriers Level of fixed costs Commodity nature of product Choosing strategy in Declining Markets Leadership strategy: Becoming dominant player in declining industry Niche strategy: Focus on pockets of demand to maintain profitability Harvest strategy: Reduction to a minimum → assets reduce cost structure + extract maximum profits Divestment strategy: Selling business assets to others CHAPTER 7: Business Vertical Integration Vertical integration Expaning operations forward or backward into an industry Backward vertical integration: Produces inputsfor products Forward vertical integration: Uses, distributes or sells products Logic of Value Chain Economies Focal firm able to create synergy with other firms o Cost reduction o Revenue enhancement Focal firm able to capture above normal economic returns Zusammenfassung Strategic Management Increasing Profitability Through Vertical Integration VI increases product differentiation, lower costs + reduces industry competition when: o Investments in efficiency-enhancing specialized assets o Protects product quality o Results in improved scheduling o Avoids perfect competition VI=Value added/Sales Three Value Considerations Leverage Capabilities: capabilities may be sources of competitive advantage in other businesses Manage Opportunism: Opportunism may be checked by internalizing Exploit Flexibility: Internalizing usually less flexible; flexibility is priced when uncertainty is high Rarity of VI - Integration vs. Non-integration Firms integration is rare because it integrates or not Its integration strategy rare or common with respect to the value created by the strategy Imitability of VI – Form vs. Function Value producing function may be costly to imitate Integrated firm possesses resource combinations that are a result of o Historical uniqueness o Casual ambiguity o Social complexity Imitability of VI – Modes of Entry Acquisition and internal development are alternatives to entry Boundaries of a firm would encompass new businesses Organizing VI – Management Controls Managers efforts to achieve desired value chain economies o Cooperation and competition among + between functions o Integration of new business into existing business o Time horizon of managers Budgets: separating strategic and operational budgets Board Committees: provide oversight + direction to managers Problems with VI Increasing cost structure Disadvantages arise when technology is changing fast and demand is unpredictable Vertical disintegration: Company decides to exit industries → value chain to its core industry to increase profitability Zusammenfassung Strategic Management Benefits of outsourcing Low cost structure Enhanced differentiation Focus on the core business Risks of outsourcing Holdup: Risk that company will become too dependent upon specialist provider Increased competition: Building a resource that lowers barriers to entry Loss of information + forfeited learning opportunities Vertical Integration … Makes sense when value chain economies can be created and captured May allow a firm to leverage capabilities May be a response to threat of opportunism + uncertainty Important consideration in the decision to expand internationally CHAPTER 8: Diversification Logic of Corporate Level Strategy Should create value o Businesses forming corporate whole worth more than under dependent ownership o That equity holders cannot create through portfolio investing Corporate level strategy must create synergies Integration and Diversification Types of Corporate Diversification Product Diversification: operating in multiple industries Geographic Market Diversification: operating in multiple geographic markets Product-Market Diversification: operating in multiple industries in multiple geographic markets Limited Diversification Related Diversification: related-constrained → all businesses related on most dimensions Related-linked → some businesses related on some dimensions Unrelated Diversification: businesses are not related Zusammenfassung Strategic Management Benefits of Horizontal Integration Lowers cost structure Increases product differentiation Leverages a competitve advantage Reduces rivalry within the industry Increases bargaining power over suppliers + buyers Problems with HI Difficult to implement Increase in prices; abuse of power; crushing potential competitors Related vx. Unrelated diversification Related Diversification Unrelated Diversification Competencies can be applied across Managers skilled at raising profitability greater number of industries Use strategic management Company has superior strategic competencies to: improve competitive capabilities → keep bureaucratic cost advantage and keep bureaucratic costs under control under control Diversification – 5 Ways to improve profitability Transfer competencies between business units in different industries Leverage competencies to create business units in new industries Share resources between business units to realize synergies or economies of scope Use product bundling Utilize general organizational competencies that increase performance Transferring Competencies Taking distinctive competency developed in one unit and implement it in another industry Commonality: Skill or competency when shared allows to operate more effectively Increase profitability when they: o Lower cost structure of business units o Enable its business units to differentiate their products Distinctive competency being transferred must have real strategic value Leveraging Competencies Taking distinctive competency developed unit in one industry + using it to create a new business unit in a different industry → applied to create differentiation Sharing Resources and Capabilities Economies of scope: Synergies arise when business units are able to lower costs or increase differentiation Sources of cost reductions o Sharing lowers cost structure o Marketing functions leading to a higher ROIC Zusammenfassung Strategic Management Product Bundling Providing products that are connected to each other → allows companies to expand their range Goal: Bundle products to offer customers: lower prices, superior set of services General Organizational Competencies Help business units performing at higher level that it could as a separate or independent company Types: Entrepreneurial capabilities, organizational design capabilities, strategic capabilities Entrepreneurial Capabilities Required to take advantage of free cash flow To promote EC, a company must: o Encourage managers to take risks o Give them time and resources to pursue novel ideas o No punishment when idea fails o Make sure that free cash flow is not wasted in risky ventures CHAPTER 9: CHOICE of Entry Strategic Alliances Globalization of Production and Markets lead to: Home Markets being inundated by foreign competitors Expansion into other markets critical to maximize efficiency, quality, customer responsiveness Realizing Cost Savings from economies of scale by: Spreading fix costs by setting up production facilities over global increasing sales volume Utilizing production facilities more intensively by serving global market Economic benefits from production in an optimal location: Achieve low-cost position differentiate product offering and marketing strategy globally to serve local responsivness → competitive advantage but raises cost structure of company ! transportation costs and trade barriers complicate benefits of location economies Zusammenfassung Strategic Management Global Standardization Strategy: Low-cost strategy on global scale Standardized product worldwide for maximum benefit from economies of scale Used when: cost reduction strongly needed; demand local responsiveness minimal Localization Strategy: Increasing profitability by customizing products Used when: cost pressure not strong; consumer tastes differ across markets Benefit: Product value raises in local market; BUT: cost-reduction by mass production not possible Transnational Strategy: Achieve low costs, differentiate Products across markets, foster flow of skills btw. Subsidiaries Difficult because it places conflicting demands on a company (low-cost →differentiation) International Strategy: Establishes prod. & marketing functions in each market (countries served) Limited local customizing of product offering and adjusting of marketing strategy Used when: product serving universal needs, no cost pressures Choices of Entering new Markets: Exporting o + location and scale-based economies o – high transport costs, trade barriers, local marketing Licensing (purchasing rights to produce a company’s product in their country for a fee) o + Low development costs/risks o – no location and scale-based economies, no global strategic coordination possible, lack of control over technology used Franchising o + low development costs and risk o - no global strategic coordination possible, lack of control over quality Join Venture o + access to local partners knowledge, shared dev costs o - no global strategic coordination possible, no location and scale-based economies Wholly owned subsidiary o + protection of technology, global strategic coordination, location and scale-based economies o High risks and costs Strategic Alliances: Cooperative effort between two or more independent organizations to develop, manufacture or sell products/services Creating economic value by Using/Leveraging complementary resources/capabilities Produces gain from trade due to comparative/absolute advantage → Choose partners, that are better at something than you are How Strategic Alliances create value: improving current operations o Exploiting economies of scale: increased market share/manufacturing capacity o Learning from partners: new tech/knowledge o Risk/cost sharing shaping competitive environment o facilitate tech standards Zusammenfassung Strategic Management o facilitate tacit collusion: communication in alliance with partners in legal way instead of illegally forming cartels facilitating entry/exit o low-Cost entry in new industries → partner provides access o low-cost exit → partner is informed buyer o managing uncertainty o low-cost entry in new geographic markets → partners provide local knowledge Value creation and Allocation in Alliances is difficult because of monitoring partner inputs, value creation and allocation value to specific partners. Strategic alliances as form of organizing economic exchange isn’t rare. HOWEVER, sources of value creation within alliances may be rare and costly (finding alliance-partners with complimentary resources is limited → first mover advantage) Substitution of Strategic Alliances: Internal Development (of resources /capabilities) if: no partner available transaction-specific investment is high low uncertainty about investment Merger & Acquisitions if: no anti-trust issues low certainty about investment firms can be integrated easily value of combined firm not tied to independence Governance Responses to Challenges of Value Creation and Allocation: Combination of formal and informal Governance Responses Formal: Explicit Contracts & Legal Sanctions – creating mutual understanding, imposing costs for cheating Joint Ventures – align interests of partners through ownership of independent firm, direct effect Equity Investments – align interest through ownership of each other, indirect effect Informal: Trust & Firm Reputation (sources of competitive advantage because costly to imitate) THE BIG CHALLENGE: maximizing gains from trade while minimizing threat of cheating