MGMT4210 Notes PDF

Strategy: - How to create/ capture/ sustain value -\> generate financial returns in LR - Three levels of strategy:\ 1. Corporate Strategy: Where (which business should we be in) 2\. Business Strategy: How (how should we compete in business) 3\. Functional Strategy: Business U...

Strategy: - How to create/ capture/ sustain value -\> generate financial returns in LR - Three levels of strategy:\ 1. Corporate Strategy: Where (which business should we be in) 2\. Business Strategy: How (how should we compete in business) 3\. Functional Strategy: Business Units - Factors affecting strategy: - PEST (Political, Environmental, Socio-cultural, Technological) - Potential Entrants, Substitutes - Industry: Firm (Resources and capabilities), Competitors A diagram of a cost Description automatically generated with medium confidence Opportunity cost: net benefit of best alternative option (willingness to pay -- cost)  Goal of strategy: Maximize economic profit in LR Industry: - Group of firms that are related in terms of their primary business activities - Related \ substitutable - Supply side: similar production process - Demand side: similar product performance, characteristics and use - Depends on purpose of analysis - Commonly used classifications: - Standard Industrial Classification Code (SIC) - The North American Industry Classification System (NAICS) Code - Attractiveness: - Understand structure that derives profitability - Identify opportunities to enter an industry or change the structure Porter's Five Forces: A diagram of a company Description automatically generated +-----------------------------------+-----------------------------------+ | Rivalry among existing | Basis: | | competitors | | | | - Price, quantity, new product/ | | | service, location, etc | | | | | | | | | | | | - Price: Most destructive | | | | | | - Bertrand competition (price | | | war) | | | | | | - Becomes basis if | | | | | | | | | | | | - Homogeneous products | | | | | | - Perishable products | | | | | | - Low switching costs for | | | buyers | | | | | | | | | | | | - Intensity depends on: | | | | | | | | | | | | - Number of competitors | | | | | | - Market concentration | | | | | | - Industry growth | | | | | | - The industry's product | | | differentiation | | | | | | - Nature of capacity addition | | | | | | - Exit barriers | +===================================+===================================+ | Bargaining power of suppliers | - Depends on: | | | | | | | | | | | | - the relative concentration | | | | | | - the industry's switching | | | costs in changing suppliers | | | | | | - the degree of differentiation | | | of suppliers' goods | | | | | | - the threat of forward | | | integration by suppliers | +-----------------------------------+-----------------------------------+ | Bargaining power of buyers | - Depends on: | | | | | | | | | | | | - the relative concentration | | | | | | - the buyers' switching costs | | | | | | - the degree of differentiation | | | of the industry's goods | | | | | | - the threat of backward | | | integration by buyers | +-----------------------------------+-----------------------------------+ | Threats of new entrants | - Depends on: | | | | | | | | | | | | - Economies of scale | | | | | | - Network effects | | | | | | - Buyers' switching cost | | | | | | - Capital requirements | | | | | | - Incumbent advantages | | | | | | - Access to distribution | | | channel | | | | | | - Government policy | +-----------------------------------+-----------------------------------+ | Threats of substitutes | - A good +ve cross-price | | | elasticity | | | | | | - Their threat depends on price | | | performance trade off offered | | | by the substitute | +-----------------------------------+-----------------------------------+ | Complements | - Good -ve corss-price | | | elasticity | | | | | | - Complements influencing | | | industry's profitability: | | | | | | 1. Increase buyer's willingness | | | to pay -\> increase value | | | creation + price -\> increase | | | value capture | | | | | | 2. Exercise bargaining power -\> | | | decrease value capture | +-----------------------------------+-----------------------------------+  Competitive dynamics: - Total sets of actions and responses to compete for superior profitability among existing competitors within an industry - Strategic interdependence: Firm's value creation and capture depends on its competitors' strategic actions - From demand side and supply side: similar or not (eg products, production process) - Framework: Game theory: - Two or players strategically interact with one another, and the strategy chosen by one player will affect the payoff of the other player A table with black text and white text Description automatically generated Analyzing competitive dynamics: +-----------------------------------+-----------------------------------+ | Players | Figure out who the competitors | | | are: | | | | | | - Clearly define the industry | | | (Demand and supply side | | | suitability) | | | | | | - Understand strategic | | | interdependence | +===================================+===================================+ | Competitive actions | - Understand sets of possible | | | strategic actions/ responses | | | | | | - Assess **whether** your | | | competitors will act/ respond | | | (Awareness + Motivation + | | | Capability) | | | | | | - Analyze **how** they will | | | act/ respond (Speed + Type + | | | Magnitude) | +-----------------------------------+-----------------------------------+ | Payoffs | Evaluate how these actions/ | | | responses will affect | | | profitability | +-----------------------------------+-----------------------------------+ Industry analysis: Porter's Five Forces (macro perspective + static analysis) Competitive dynamics analysis: Game theory (in rivalry among existing competitors) (micro perspective + dynamic analysis) +-----------------------------------+-----------------------------------+ | Product Innovation | - Increase buyer's willingness | | | to pay | | | | | | - Increase value creation and | | | capture | | | | | | - Increase price | +===================================+===================================+ | Process Innovation | - Decreases costs | | | | | | - Increase value capture | +-----------------------------------+-----------------------------------+ Competitive advantage: Explains the winner of the competition among firms Comparative advantage: Explains the patterns of trade between industries/ countries +-----------------------+-----------------------+-----------------------+ | | Resources | Capabilities | +=======================+=======================+=======================+ | Definition | Tangible and | Managerial and | | | intangible assets | organizational | | | that a firm controls | processes that enable | | | and can use to | a firm to take full | | | formulate and | advantage of its | | | implement strategies | resources to create | | | to create and capture | and capture value | | | value | | +-----------------------+-----------------------+-----------------------+ | Examples | Financial, human, | Operations: create | | | equipment, culture/ | and capture value (eg | | | brand | manufacturing) | | | | | | | | Dynamic: processes | | | | that continuously | | | | modify existing | | | | resources and improve | | | | existing operating | | | | capabilities | | | | | | | | (eg M&A) | +-----------------------+-----------------------+-----------------------+ - VRIO Framework - Valuable: increase buyers' WTP/ decrease operating costs -\> Create value - Rare: Not available to other competitors: capture value -\> Capture value - Inimitable: difficult to replicate or substitute - Organized: employed throughout value chain in structured manner  Difficulty in sustaining competitive advantage: - Imitation: Pure replication/ Substitution (Imitable) - Dissipation: Changes in internal (R&C)/ external (industry forces + PEST) factors (Organized) Avoiding Imitation: +-----------------------------------+-----------------------------------+ | Isolating mechanisms (barriers to | - Path dependence | | imitation) | | | | - Tacit knowledge | | | | | | - Casual ambiguity | | | | | | - Complexity | | | | | | - Time compression diseconomies | | | | | | - Virtuous/ vicious circles | | | | | | - Legal systems | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | Organize R&C around strategically | - Activities: Distinct business | | coherent set of activities in | processes that add value by | | value chain | transforming input to output | | | | | | - Value chain: | | | | | | | | | | | | - Industry value chain: choose | | | to enter/ exit tiers in chain | | | by analyzing structureA gray | | | rectangular button with black | | | text Description | | | automatically generated | | | | | | - Firm value chain | | | | | | | | | | | | - Which activity to employ R&C | | | in | | | | | | - How to perform activity with | | | R&C | | | | | | - How to manage activities that | | | the firm does not perform | +-----------------------------------+-----------------------------------+ A diagram of a business Description automatically generated To analyze value chain: 1. Lay out industry value chain 2. Identify firm value chain in relation to industry value chain 3. Map firm's choice of activities in firm value chain 4. Assess firm's relative advantage in price/ cost (compare performance with competitors) Cost Leadership: To increase value capture by: - Operating at lower cost than competitors - Offering products/ services at lower price than competitors - Lowered cost \> lowered price to attain economic benefit - Cost drivers: 1. Economies of scale 2. Economies of learning (learning curve effect) 3. Production and process technology 4. Product design 5. Input costs 6. Managerial efficiency Differentiation: To increase value capture by: - Increasing buyers' WTP - Charging higher price than competitors - Increase of WTP \> Increase in price to attain economic benefit +-----------------------------------+-----------------------------------+ | Demand Side: what buyers prefer | Supply Side: what the firm can | | | offer | +===================================+===================================+ | 4P Framework: | Price Drivers: | | | | | - Price | - Product Innovation | | | | | - Product | - Complementary services | | | | | - Place | - Quality of inputs | | | | | - Promotion | - Skill and exp of employees | +-----------------------------------+-----------------------------------+ Business Model: - Framework for making money: +-----------------------------------+-----------------------------------+ | Who: Market Segment | Who are the target customers? | | | | | | Market Size: | | | | | | - Mass market (necessities) | | | | | | - Niche market (luxuries) | +===================================+===================================+ | What: Customer value proposition | What are the needs of the target | | | customers that your products and | | | services satisfy? | | | | | | Difference in needs between | | | customer and CVP of our company | | | | | | - Price drivers | +-----------------------------------+-----------------------------------+ | How: Revenue model | How does the firm monetize its | | | CVP? | | | | | | Price: | | | | | | - Who pays? (buyer vs supplier | | | vs 3^rd^ party) | | | | | | - For what? (Product only vs | | | product + complement vs | | | complement vs transaction) | | | | | | - How much? (Fixed vs vary) | | | | | | - What is the price based on? | | | (ownership vs usage) | | | | | | - When is the payment? (before | | | vs after 1^st^ usage) | | | | | |  | +-----------------------------------+-----------------------------------+ | How: Cost structure | What are the major costs | | | monetizing CVP? | | | | | | - Coordination costs: input | | | costs, R&D costs, | | | Manufacturing costs, | | | Marketing costs | +-----------------------------------+-----------------------------------+ Platform: - Matchmaking firm that creates and captures value by providing infrastructure to reduce transaction costs between suppliers and buyers to facilitate exchanges - Transactions costs lowered - Transaction volume increased - To create and capture value: build and maintain infrastructure to reduce transaction costs - Why? Key R&C: relationship with suppliers and buyers - To sustain value: Key barriers to enter/ imitate: Network effect + switching costs +-----------------------------------+-----------------------------------+ | Pipeline (firm) | Platform | +===================================+===================================+ | - Resource control | - Resource orchestration | | | | | - Internal Optimization | - External transaction | | | | | - Customer value | - Ecosystem value | | | | | - Supply side economies of | - Demand side network effects | | scale | | +-----------------------------------+-----------------------------------+ Platform: Traditional vs Today: Driven by technology innovation in infrastructure +-----------------------------------+-----------------------------------+ | Hardware: eg real estate, | Software: Website/ App, Operating | | telephone | System | | | | | | - Demand side: Access to more | | | customers and their info | | | | | | - Supply side: Access to more | | | suppliers, complementors and | | | their info | | | | | | | | | | | | - More direct+ indirect network | | | effects + economies of scale | | | -\> increase buyers' WTP + | | | decrease operating cost =\> | | | create, capture and sustain | | | more value | | | | | | - Business model innovation -\> | | | increase value creation/ | | | capture | +===================================+===================================+ | Key Participants: | Major challenges: | | | | | - Complementors (eg product | - Competitors: Imitation | | sellers, content creators, | | | app developers, advertisers) | - Disintermediation: when | | | buyers and sellers connect | | - Users | with each other without using | | | the platform | | | | | | - Bargaining power, | | | integration, multi homing | | | (using more than one | | | platform) | +-----------------------------------+-----------------------------------+ Levels of strategy: - Corporate strategy: Where should we in? - Internal Firm Scope: Internal Boundaries through vertical integration and horizontal diversification - External Firm Scope: How to set external boundaries by interacting with other factors through M&A and strategic alliances? - Geographical Scope: Where to operate and how to compete in different countries? - Business Strategy: How should we compete in business? - Functional Strategy Not all value chains are regularly profitable (different profit potentials) Vertical Integration: +-----------------------------------+-----------------------------------+ | Potential Benefits | Potential Costs | +===================================+===================================+ | - Lower costs | - Increasing costs | | | | | - Improves quality and enhance | - Reducing quality | | customer exp | | | | - Reducing flexibility | | - Facilitates scheduling and | | | planning | - Increasing potentiation for | | | legal repercussions | | - Facilitates investment in | | | specialized assets | | | | | | - Secures critical supplies/ | | | raw materials and | | | distribution channels | | | | | | - Eliminate market failures | | +-----------------------------------+-----------------------------------+ Diversification: - Geographic Diversification: Increase in variety of geographical markets - Product Diversification: Increase in variety of products, active in several product markets Related vs unrelated diversification: A diagram of a business Description automatically generated +-----------------------------------+-----------------------------------+ | Potential Benefits | Potential Costs | +===================================+===================================+ | - Economies of scale | - Diseconomies of scope | | | | | - Economies of scope | - Costs of conflict, | | | coordination, compromise | | - Synergies (cost, revenue) | | | | - Mixed motives | | - Provide internal capital | | | markets | - Cognitive conflicts | | | | | | - Reputation risks | | | | | - Way to allocate capital more | | | efficiently | | +-----------------------------------+-----------------------------------+ Evaluating Scope Decisions: 1. Better off test: Does presence of corporation improve the competitive advantage of over and above what they can achieve themselves - Cost synergies: C1+2 \< C1+ C2 (Economies of scope: share duplicate activities) - WTP synergies: WTP1+2 \> WTP1+ WTP2 (Cross-selling benefits: shared valued R&C, improved branding) 2. Ownership test: Do you need to own it? - Build/ Borrow/ Buy? M&A and Strategic Partnerships: 1. Ownership Test: Do you need to own it? 2. Build, Borrow or Buy Framework:  - Internal Resources are relevant if: (if yes, build internally) - Similar to those the firm needs to develop: - Difficult to assess - Execs don't know what they don't know - Superior to those of competitors in targeted area: assessed through VRIO framework - Targeted resource is tradable if (if yes, borrow via contracts): - Firm can source the resource externally through a contract that allows for transfer of ownership or use of resource - Short term and long term contracts (eg licensing/ franchising - Need to be close to partner? If no, borrow via alliance. - Partnerships, equity alliances, joint ventures -\> enable highly collaborative combination of resources and activities by multiple parties for a period of time - Most effective: relatively few people from each party work together on joint activities. - Active management required - Can integrate the target firm? If yes, buy: M&A: most time consuming and expensive, but more control and speed - Assess ex-ante whether post-deal integration is feasible: - Effectively integrate target firm's resources without damaging employee motivation at either firm/ destroying value? - Planned synergies realistic? - Mergers: Joining two independent companies into a combined entity - Acquisitions: Purchase/ Takeover of one company by another - Types: - Horizontal Integration (direct competitor) - Vertical integration (supplier/ buyer) - Diversification (outside industry) A questionnaire with black text Description automatically generated Strategic Alliances: - Between firms, involves sharing of knowledge, resources and capabilities with intention of developing process, products or services - Non equity alliance: a partnership based on contracts - Equity alliance: partial ownership in the other - Joint venture: standalone organization jointly owned by two or more companies A close-up of a checklist Description automatically generated Organization Design: Problems implementing strategy: - Coordination problem (Employee lacks information) - Cooperation problem (Employee lacks motivation) Structures: - Formal: - Organizational structure: Set of R&R and the connections between these R&R - Standard Operating Procedures: Set of rules specified in document for provide direction for completing a task - Informal: - Organizational structure: Set of values, norms and beliefs collectively shared within the firm Control: Internal governance mechanisms to align the incentives of principals and agents and resolve the principal agent problem