Notes for Midterm1

8/3/2019 Notes for Midterm1

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Mission/Goal

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process


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GOAL

CONCEPTUAL OVERVIEW

The Environment -

Threats & Opportunities

Capabilities -

Strengths & Weaknesses

Managements values &attitude toward risk

STRATEGY


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Strategic Management

What isManagement?


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What isManagement?

Leading

Controlling Planning

Organizing


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Strategic Management What is Strategic?

Important

Critical

Central

Long Term

What is Management? Setting goals and

objectives

Allocation of scarce

resources Orchestrating the behavior

of organizational members

Monitoring performance


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Examples of StrategicDecisions:

Should we enter a new market?

Should we introduce a new service?

Should we acquire a competitor?

Your decision to be here is strategic:

What college should I attend?

Should I get married?


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Important Terms

Top level managers making proactivedecisions regarding allocation of significant

resources which will have a decidinginfluence on the long-term performance ofthe entire organization as compared to its

competitors. Afterwards, orchestrating the

entire organization in implementing thedecision(s).



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Important Terms

A firms theory about how to gain

competitive advantage

Unifying theme that gives coherence anddirection to individual decisions of an

organization.

Strategy


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The Environment -

Threats & Opportunities

Managements values &

attitude toward risk

Organizations resources

and capabilities -

Strengths & Weaknesses

GOAL

CONCEPTUAL OVERVIEW

Performance

Implementation Levers:

Organization structureSystems and processesPeople and rewards

Strategic Leadership:

Lever and resourceallocation decisions

Develop support amongstakeholders

STRATEGY


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Strategy Formulation &Implementation

Intended

STRATEGY

Realized &

Emergent

STRATEGY

Implementation Levers:

Organization structureSystems and processesPeople and rewards

Strategic Leadership:

Lever and resourceallocation decisions

Develop support amongstakeholders


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Nature of Strategy

Strategy leads to superior performance.

Clarity of direction

Ability to recognize opportunities

Ability to maneuver into a position ofadvantage

Focus: for-profit organizations, i.e. firms.


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Purpose of a Firm The purpose of a firm is to create valuethat

meets the needs of its stakeholders. Stakeholders: All the parties that have a stake(interest) in the success of a firm.

Owners/Stockholders

Employees

Customers

Suppliers

Governments

Local Communities

Trade Associations

Public at Large


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Stakeholder Group Examples of Value Provided

Stockholders Stock price appreciation and dividends

Customers Products and services

Employees Employment, wages, personal growth

opportunitiesSuppliers Revenue through sales, growth

opportunities

Local Community Jobs, economic development, civic

involvementSociety at Large Economic health and security,

environmental protection

Trade Associations Political strength, operating funds


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Stakeholder View of the Firm Fiscal Responsibility

Social Responsibility How can the firm meet its obligations to such a

diverse set of stakeholders?

The dominant objective of a business firm is tomaximize profits:

Meeting the obligations to stockholders is a prerequisite foraddressing the needs of other stakeholders in a serious

and sustained manner.Firms need to make a profit before they can devote their

attention to other concerns.

A business cannot exist without a positive cash flow.


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Profits Accounting Profits

Net Income

Economic Profits/Economic Rents/EconomicValue Added/Rents: Income that is surplusover and above the costs of all the inputsrequired for production. real profits most comprehensive and accurate ultimate measure

Net Income = EVA +Cost of Equity Cost of Equity: Total return to a portfolio of

stocks with similar risk. Proxies for EVA: ROA, ROE, Profit Margin.


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Sources of Profits

Choice of industries/businesses

---> corporate strategy: scope of the firmin terms of industries and markets in whichit competes.

Position of advantage vis-a-vis competitiveforces within a particular industry.

---> business/competitive strategy


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What is Strategy?Strategy answers the question How can the firm

make money?

Superior Profitability

How do we make

money?

Industry Attractiveness

Which industries should we

be in?

Positioning

How Should we compete?

Corporate

Strategy

Competitive

Strategy


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Levels of Strategy

CorporateStrategy

Business Strategies

Functional Strategies

Employees

Two-Way Influence

Two-Way Influence

Corporate-LevelManagers

Business-LevelManagers

Functional

Managers


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Features of Winning Strategies

Goal-Directed.

Based upon profound understanding of theenvironment in which the firm operates.

Based upon objective assessment of thefirms resources and capabilities.

Effectively implemented.


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Consistency is important

Consistency with the external environment

Consistency with resources andcapabilities

Consistency with organization structure

and systems Internal consistency


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Strategic ManagementPrinciple

A companys strategy ought to be

grounded in its resources and in

what it is good at doing (itscompetencies and competitive

capabilities); it is perilous to craft a

strategy whose success isdependent on resources and

capabilities that a company lacks!


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Strategic Management Principle

A companys strategy cant

produce real market success

unless it is well-matched to

industry and competitiveconditions!


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Strategic AnalysisIndustry analysis

Customer/marketplace trends

Environmental forecast

Competitor AnalysisAssessment of internal resources,

capabilities

SupportingOrganizational

ArrangementsStructure

Process

Symbols

RewardsPeople

Activities

Functional policies

and profiles

Objectives

Specific targets

Mission

Fundamental

purpose

Values

Strategy

The central

integrated

concept of how

wewill achieve our

objectives.


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SwissArmy Knives

What external forces influenced Victorinox,the manufacturer of Swiss Army Knives?

How did the company respond to theseforces?

What are some of Victorinoxs strengths?

Do you think Victorinox has a bright futuregiven its strategy?


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External Assessment


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Agenda for External Assessment

Forces in the general environments andtheir strategic implications

Determinants of industry profitability

Sources of competition in the industryenvironment

Strategic groups

Competitor appraisal

Industry segments


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External Assessment Defined

External Assessmentis the Gathering and

Analysis of Information About Relevant

Environmental Trends.


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MACROENVIRONMENT

The Economy

at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

RivalFirms

IMMEDIATE INDUSTRY

AND COMPETITIVEENVIRONMENT


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General/Macro Environment

Internal Environment

Our Business

Industry Environment

Segment, Strategic Group


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Why External Assessment?

External analysis allows firms to:

discover threats and opportunities

see if above normal profits are likely in an industry

better understand the nature of competition in

an industry

make more informed strategic choices


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External Assessment

The most difficult task to do yet the mostsignificant factor affecting a companys

success or failure.

Digital cameras to film

Computers and printers to typewriters

Singer

Proactive nature of StrategicManagement.


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Political/

LegalIndustry

Environment & Our

Business

Demographic Economic

Technological

Global

Sociocultural

General Environment Components


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Strategic Implication of Macro-Environmental Forces

The general environment affects entireindustries.

The same environmental trend can havedifferent effects on different industries.

The impact of an environmental trendoften differs significantly for different firms

within the same industry. Spotting trends before competitors may

lead to competitive advantage.


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Strategic Implication of Macro-Environmental Forces

Factors in the general environment may overlapand influence one another.

To identify major trends factors comprising the

general environment need to be systematicallyexamined: What environmental factors are affecting industries in

which we operate? In what direction?

Which of these are the most important in the presenttime? In the next few years?

What is their effect on our competitive position andperformance?


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Industry Analysis

What determines the level of profits in anindustry?

Potential Profits = Value - Cost.

Potential Profits are not equal to Actualprofits.

Profits earned by firms in an industry are

determined by:1. the value of products/services to customers.

2. the existence and strength of competitiveforces (Porters Model).


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Industry Analysis

1. Who are our customers? What do they want?How do they choose between competingsuppliers?

The key to winning long-term customers isto understand their wants and needs andsatisfy them better than competitors.

2. What are the forces driving competition? Howintense is competition? How can a firm obtainsuperior competitive position?

A d


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Agenda

Sources of competition in the industryenvironment

Key success factors of an industry

Strategic groups

Competitor appraisal

Industry segments

Competition at different stages of industry life

cycle Turn in info sheets and list of team members on

Thurs (Mar 8)

Fi F M d l f C i i


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Five Forces Model of Competition

Substitute

Products(of firms in

other industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers ofKey Inputs

Buyers

Substitute

Products(from OTHER

industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers ofKey Inputs

Buyers

Wh t i C titi Lik & H


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What is Competition Like & HowStrong Are the Competitive Forces?

To identify

Main sourcesofcompetitive forces

Strengthof these forces

Key analytical tool Five Forces Model of

Competition

Objective

How to Do It


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How to Do It

Explain how eachforce acts to create competitive

pressureWhat are the factors that cause eachforce to be strong or weak?

Assess strengthof each of the five competitiveforces (Strong? Moderate? Weak? ) Rivalry among competitors

Competition from substitute products

Competitive threat from potential entrants

Bargaining power of suppliers

Bargaining power of buyers

Decide whether overall competition (thecombined effect of all five competitive forces)isbrutal, fierce, strong, normal/moderate, or weak

Competitive Force of Substitute


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Competitive Force of SubstituteProducts

Substitutesmatter when customers are attracted tothe products/services of firms in

OTHER INDUSTRIESNOT from Other Competitors

Concept

Coffee vs. Tea vs. Coke

Sugar vs. Artificial Sweeteners

Plastic vs. Glass vs. Metal

Newspapers vs. TV vs. Internet

Examples


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Porters Five Forces Model

Threat of Substitutes

substitutes fill the same need but in a different way

- Coke and Pepsi are rivals, milk is asubstitute for both

substitutes create a price ceiling because consumersswitch to the substitute if prices rise

substitutes will likely come from outside theindustrybe sure to look


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Are there substitutes for theproduct/service?

How willing are the customers to shift theirpurchases on the basis of changes inprice?

Competitive Force of SubstituteProducts

Principle of Competitive


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Principle of CompetitiveMarkets

The competitive threat of substitutesis strongerwhen they are:

Readily available

Attractively priced

Believed to have comparable orbetter performance features

Customer switching costs are low


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Threat of Entry

if firms can easily enter the industry, any abovenormal profits will be bid away quickly

barriers to entry lower the threat of entry

barriers to entry make an industry more attractive


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Competitive Force of Potential Entry

Barriers exist when Newcomers confront obstacles

Economic factors put potentialentrant at a disadvantagerelative to incumbent firms

Effectiveness of entry barriersdepends on the resources andstrategies of new entrants.

Common Barriers to Entry


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Common Barriers to Entry

Capital requirements and/or other specialized resource

requirements Economies of scale

Cost disadvantages independent of size

Existence of learning/experience curve effects

Access to raw materials

Strong brand preferences and customer loyalty

Access to distribution channels

Regulatory policies, tariffs, trade restrictions Retaliation

Effectiveness of entry barriers depends on the resourcesand strategies of new entrants.

Principle of Competitive


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Principle of CompetitiveMarkets

Threat of entryis strongerwhen:

Entry barriers are low

Incumbents are unwilling or unable tocontest a newcomers entry efforts

Newcomer can expect to earnattractive profits


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Threat of Rivalry

high rivalry means firms compete vigorouslyandcompete away above average profits

Industry conditions that facilitate rivalry:

large numbers of competitors

slow or declining growth

high fixed costs low product differentiation


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Threat of Buyers powerful buyers can lower profitability of an industry

by demanding lower prices and/orhigher levels of quality and service

Industry conditions that facilitate buyer power:

small number of buyers

lack of a differentiated product

the product is significant to the buyer

the importance of the product to the quality of the buyersproduct

importance of the item as a proportion of total cost


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Threat of Buyers

Industry conditions that facilitate buyer power:

buyers operate in a competitive marketthey arenot earning above normal profits

buyers can vertically integrate


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Threat of Suppliers

powerful suppliers can lower profits

Industry conditions that facilitate supplier power:small number of firms in suppliers industry

highly differentiated product

lack of close substitutes for suppliers products

supplier could integrate forward

industry is an insignificant customer of supplier


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External EnvironmentAnalysis:

Trends in the

Macro-environment

Industry Analysis

Industry Attractiveness

Which industries should we

be in?

Positioning

How Should we compete?

Corporate

Strategy

CompetitiveStrategy


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General Prerequisites for Success

Supplying a product/servicewhich customers are willing to

pay a price that exceeds the cost

of production.

The ability to

survive competition

Analysis of Customers

&

Demand

Analysis of Competition

Key Success Factors


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Key Success Factors

Key Success Factors (KSFs): Specificperformance dimensions that a firm mustachieve to attract customers and to

survive competition. Sources of competitive advantage

Basis for business-level strategies

Identifying Industry


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Identifying IndustryKey Success Factors

Answers to two questions pinpoint KSFs On what basis do customers choose between

competing brands of sellers?

How can a firm survive competition in thisindustry?

KSFsconsist of afew really major

determinants of financial andcompetitive success in an industry

What are the Key Factors for


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What are the Key Factors forCompetitive Success?

Competitive elements most affecting everyindustry membersability to prosper

Specific strategy elements

Product attributes Resources

Capabilities

KSFsspell the difference between Profit and loss

Competitive success or failure

Common Types of


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Co o ypes oKey Success Factors

Distribution-

related

Marketing-related

Skills-related

Organizationalcapability

Other types

Technology-

related

Manufacturing-related

Scientific research expertise; Product innovation capability; Expertise

in a given technology; Capability to use Internet to conduct variousbusiness activities

Low-cost production efficiency; Quality of manufacture; High use offixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products

Strong network of wholesale distributors/dealers; Gaining amplespace on retailer shelves; Having company-owned retail outlets; Low

distribution costs; Fast deliveryFast, accurate technical assistance; Courteous customer service;Accurate filling of orders; Breadth of product line; Merchandisingskills; Attractive styling; Customer guarantees; Clever advertising

Superior workforce talent; Quality control know-how; Designexpertise; Expertise in a particular technology; Ability to developinnovative products; Ability to get new products to market quickly

Superior information systems; Ability to respond quickly to shiftingmarket conditions; Superior ability to employ Internet to conductbusiness; More experience & managerial know-how

Favorable image/reputation with buyers; Overall low-cost; Convenientlocations; Pleasant, courteous employees; Access to financial capital;Patent protection

Example: KSFs for Beer


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Example: KSFs for BeerIndustry

Utilization of brewing capacity -- to keepmanufacturing costs low

Strong network of wholesale distributors -- to gain access to retail outlets

Clever advertising -- to induce beer

drinkers to buy a particular brand


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Dunkin Donuts

Evaluate the strength of each one of the 5forces

Evaluate the overall attractiveness of this

industry

Identify KSFs


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Competitor Analysis

Knowing ones competitors critical toeffective strategic management.

What does a firm need to know about its

competitors? Who are our competitors?

What are their strategies?

What are their objectives?

What are their assumptions?

What are their resources and capabilities?

Who are Our Closest


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Who are Our ClosestCompetitors?

One technique for revealing the differentcompetitive positions of industry rivals isstrategic group mapping

A strategic groupconsists of thoserivals with similarcompetitiveapproaches inan industry

Strategic Group Mapping


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Strategic Group Mapping

Firms in the same strategic grouphave two ormore competitive characteristics in common

Sell in same price/quality range

Cover same geographic areas

Be vertically integrated to same degree

Have comparable product line breadth

Emphasize same types of distribution

channels

Offer buyers similar services

Use identical technological approaches

Procedure for Constructing a


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gStrategic Group Map

STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from oneanother

distribution channels

product quality

degree of vertical integration

technology

price levels

level of advertising

product-market scope

level of customer service

Procedure for Constructing a


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gStrategic Group Map

STEP 2: Plot firms on a two-variable mapusing pairs of these differentiatingcharacteristics

STEP 3: Assign firms that fall in about thesame strategy space to same strategicgroup

STEP 4: Draw circles around each group,making circles proportional to size ofgroups respective share of total industry

sales

Example: Strategic Group Map of


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p g p pthe Video Game Industry

TypesofVideoGame

S

uppliers/Distrib

utionChannel

s

Overall Cost to Players of Video Games

Low(Coin-operated

equipment)

Medium(Video players

cost $100-$300)

High(Use PC)

Video Arcades,Coin-

OperatedMachines

Home PCs

Videogame

consoles

OnlineVideo game

sites

Sony, Sega,Nintendo, several

others

Arcadeoperators Publishers

of games onCD-ROMs

MSN Gaming Zone,Pogo.com,

America Online,HEAT, Engage,Oceanline, TEN

Guidelines: Strategic Group


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Guidelines: Strategic GroupMaps

Variables selected as axes should notbe highlycorrelated

Variables chosen as axes should expose bigdifferences in how rivals compete

Variables do nothave to be either quantitative orcontinuous

Drawing sizes of circles proportional to combined

sales of firms in each strategic group allows mapto reflect relative sizes of each strategic group

If more than two good competitive variables can

be used, several maps can be drawn


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Competitor Analysis

Competitors current strategy

Competitors objectives

Competitors assumptions about the

industry

Competitors resources and capabilities

WHAT ARE THEIR


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STRATEGIES?

Annual reports Public speeches of top management

Websites

What investments did they undertake recently? What hiring is taking place?

What new products are they developing?

What mergers/acquisitions/etc have theyundertaken recently?

What advertising campaigns have they

planned?

WHAT ARE THEIR


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OBJECTIVES?

Short-term financial goals versus long-term marketshare goals?

Other objectives: technological leadership, qualityleadership, cost leadership, etc.?

Is the competitor owned by a parent firm?

Run for growth or milked?

How much autonomy the subsidiary has? Are they satisfied with their current performance

level?

Categorizing Objectives


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Categorizing Objectivesand Strategies of Competitors

Competitive

Scope

StrategicIntent

Market ShareObjective

CompetitivePosition

StrategicPosture

CompetitiveStrategy

Local Be dominant

leader

Aggressiveexpansionviaacquisition &internalgrowth

Gettingstronger; onthe move

Mostlyoffensive

Regional Overtake

industryleader

Well-entrenched

Mostlydefensive

National Be among

industryleaders

Expansionvia internalgrowth

Stuck in themiddle of thepack

Combinationof offensive& defensive

Multicountry Move into

top 10

Expansionviaacquisition

Going after adifferentposition

Aggressiverisk-taker

Global

Move up a

notch inrankings

Hold on to

presentshare

Struggling;

losingground

Conservativefollower

Maintaincurrentposition

Give uppresentshare toachieveshort-termprofits

Retrenchingto a positionthat can bedefended Just survive

Striving forlow-costleadership

Focusing onmarket niche

Pursuingdifferentiationbased on

QualityServiceTechnology

superiorityBreadth of

product lineImage &

reputationMore value

for themoney

Otherattributes

Resources, Capabilities, &


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, p ,Assumptions

financial reserves capital equipment

work force

brand loyalty

management skills

assumptions


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Segmentation Analysis

Industries are heterogeneous

The nature and intensity of competition, aswell as needs of customers and KSFs vary

within industries.

Assess the attractiveness of differentsegments in terms of profits.

New entrants

Existing firms


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Steps in Segmentation Analysis

1. Identify key segmentation variables: Industries are segmented by applying

variables that subdivide the market into

discrete categories. First, identify the most appropriate variables

to use.

Segmentation variables are either thecharacteristics of customers or thecharacteristics of the product.

Examples to Segmentation Variables


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Type of Customers:

Industrial Customers Consumers

Government

Industrial Customers:

Size

Geographic Location

Industry

Technology Consumers

Demographic characteristics

Psychographic characteristics


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Examples to Segmentation Variables

Consumers

Benefits

User rate

Products

Physical size

Price level

Features

Technology/design

Performance


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Steps in Segmentation Analysis


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3. Analyze Segment Attractiveness:

Use the Five Forces Model.

Two differences:

competition from substitutes.

Ex. Station wagons - minivans

threat of new entrants

barriers to mobility protect a segment from invasion offirms from other segments.

4. Identify Segments KSFs

5. Analyze Advantages of Broad Vs. Narrow

Segment Scope


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Exploiting Industry Structure Opportunities

Generic Industry Structures

at any point in time, the structure of mostindustries fits into one of four generic categories

each industry structure presents opportunitiesthat may be exploited

Fragmented Industry Structure

Emerging Industry Structure Mature Industry Structure Declining Industry Structure


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Emerging Industry Structure

Industry Characteristics Opportunity

new industry based on breakthrough technology or product

no product standard hasbeen reached

no dominant firm has emerged

new customers come from non-consumption not from competitors

first mover advantages

technology

locking-up assets

creating switchingcosts


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C ti f th F t


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Competing for the Future

What characteristics of emergent industries weredepicted in the VCR industry?

How did JVC attain a position of advantage?

What first-mover advantages did JVC secure? What characteristics of mature industries were

depicted in the Swiss watch industry?

What did SWATCH do attain an advantageousposition?


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Fragmented Industry Structure

Industry Characteristics Opportunity

large number of small firms no dominant firms

no dominant technology

commodity type products

low barriers to entry

few, if any, economies of scale

Consolidation

buy competitors

build market power

exploit economiesof scale


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A d


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Agenda

Distinguish between resources andcapabilities

Define distinctive capabilities

Discuss role of resources and capabilitiesin strategy formulation

Identify the profit earning potential of

resources and capabilities

I t l A t


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Internal Assessment

Managers should not only focus on theexternal environment but also on theresources and capabilities of the firm.

Objectives Achieving strategic fit between the firms

resources and capabilities and its strategy

Ensuring that the firms resources are fullyexploited

Building the firms resource base

Resources of the Firm


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Resources of the Firm

1. Individual resources of the firm. E.g.equipment, skills of individualemployees, brand names, etc.

Tangible Resources

Intangible Resources

Human Resources2. Capabilities: Combinations of resources.


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Examples of Tangible Assets


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A manufacturing firms property and

equipment A telephone companys network of wire, cable,

and satellites

An entertainment companys library of oldmovies

A direct marketing firms mailing list

A natural resources companys landholdings A motel chains computerized reservation

system

A arts stores inventor

Gerber Products Co.


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Few firms can boast the kind of brand recognition, loyalty,and supermarket shelf space enjoyed by one company inparticular, one that made its name as a purveyor of muchsought-after foods like strained peas and pureed squash.When it comes time to feed their own children, generationsof American parents, themselves raised on Gerber babyfood, wouldnt buy anything else. The firm has a 75-yearhistory and commands more that 70% of the U.S. baby foodmarket. Gerbers competitors have tried to imitate fordecades with little success. Displacing the comfort andsecurity that adults experience when buying Gerber has

indeed proven difficult. In 1994, Gerber was acquired by theSwiss pharmaceutical firm Sandoz. At the time the networth of Gerbers assets, including its plants and inventory,was less than $300 million. However, Sandoz paid $3.7billion for Gerberalmost 33 times its annual profits

Intangible Resources


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ta g b e esou ces Reputation:

> main features: brands, relationships w/ customers,suppliers, and others, reputation of reliability, quality,being socially responsible

> key indicators: brand recognition, premium price,

scope of reputation.

Technological resources:> main features: stock of technology including

proprietary tech (patents, copyrights, trade secrets).> key indicators: number of patents, revenue formpatent licenses, R&D staff as a percentage of totalemployment.

Examples of Intangible Assets


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Examples of Intangible Assets

A research and development firmspatents

A restaurants secret recipe

A well known and trusted brand name

A firms good reputation

A unifying corporate culture

A high level of community support

A multinational corporations experience

with various national governments

Human Resources


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Human Resources

Main Characteristics: training, expertise,skills, adaptability, motivation,commitment, loyalty, communicative and

interactive abilities of employees. Key Indicators: educational, technical,

and professional qualifications, wages and

salaries.


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Organizational Capabilities


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Organizational Capabilities

Capability: A firms capacity to perform a

particular activity.

Managers should concentrate on thecapabilities that the firm does particularly wellrelative to its competitors.

Distinctive Capabilities / Competencies: Thoseactivities that a firm does particularly wellrelative to competitors.

ExampleC C l h id l i d l d


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Coca-Cola has a widely recognized logo anda distinctive red can with a trademarked

white wave image that goes around the can.Coca-Cola also has well established set ofreporting structures, reward systems,communications systems, and IT systems.

These are intangibleresources. Coca-Colahas access to substantial working capital(cash). This is a financial (tangible)resource. Coca-Cola has talented marketing

professionals. These are individual humanresources. Coca-Cola has the ability to putthese various resources together in aneffective marketing campaign. This is a

capability

Examples: Distinctive Capabilities


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p p

Sharp Corporation

Expertise in flat-panel display technology

Toyota, Honda, Nissan

Low-cost, high-quality manufacturing capability

and short design-to-market cycles Intel

Ability to design and manufacture ever more

powerful microprocessors for PCs Motorola

Defect-free manufacture (six-sigma quality) ofcell phones



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Principle

A distinctive capability

empowers a company tobuild competitive

advantage!

How to identify capabilities?


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How to identify capabilities?

Internal Audit (Functional Approach)classifies the capabilities with respect tothe functional areas they pertain to.

Value-Chain Analysisdivides the business into a set of linkedactivities that may each produce value for

the customer.

Internal Audit


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Every firm has certain functions that it

must perform.

Some common functions:

production/operations

marketing

R&D

financial management/accounting

HR management

general management

IS

Internal Audit


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Involves a thorough assessment of eachone of the functional areas.

Diagnostic questions

Results in identification of capabilities thatthe firm has developed in each area.

Advantage:

Very flexible.

Internal Audit

Internal Audit Questions Production/Operations


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Production/Operations Does the firm have effective inventory control policies and

procedures?

Does the firm utilize quality control procedures? Are they effective?

How does the firm do on on quality assessments?

Does the production/operations procedures work smoothly and withlittle disruptions?

Have production/operations goals been established, and are workactivities aimed at achieving these goals?

R&D Are the firms products technologically competitive?

Is communication between R&D and other units effective?

Is development time form concept to actual product appropriate?

How many products have been developed during the last year?

Financial/Accounting Are the firms capital budgeting procedures effective?

Has the firm established financial oals? Are the a ro riate?


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The Value Chain Analysis


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The firm can be divided into a number oflinked activities that each produces value forthe customer.

Focus: Creating customer value.

An activity can help the firm differentiate itsproduct.

An activity can help the firm lower its costs.

All activities of a firm can be categorizedinto:

Primary Activities

Support Activities

Typical Company Value Chain


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yp p y

DistributionAnd

OutboundLogistics

Operations

PurchasedSupplies

andInboundLogistics

Sales andMarketing

ServiceProfit

Margin

Product R&D, Technology, Systems Development

Human Resources Management

General Administration

Primary Activities and Costs

SupportActivitiesand Costs



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Primary Activities:

Inbound logistics: Warehousing, materialshandling, inventory control.

Operations: Machining, assembly, molding,testing.

Outbound logistics: Finished goodswarehousing, order processing, transportation.

Marketing and sales: Advertising, distribution of

catalogs, direct sales, distribution channeling,promotion, pricing.

Service: Repairing, supplying parts, installation.



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Support Activities: Procurement: Actual purchase of inputs.

Technology Development: Learning processes

that results in the improvements in the wayorganization functions.

HR Management: Recruiting, hiring, training,compensation.

Firm Infrastructure: Planning and accounting


Questions for Value Chain Analysis

I b d L i ti


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Inbound Logistics Is there a materials control system? How well does it work?

What type of inventory control system is there? How well does itwork?

How efficiently are raw materials handled and warehoused?

Operations How productive is the equipment compared to competitors?

Are production control systems in place? How efficient and effectiveare they?

Is the firm using appropriate level of automation?

Outbound Logistics

Are finished products delivered in a timely fashion to customers? Are they delivered efficiently?

Are they warehoused efficiently?

Questions for Value Chain Analysis Marketing and Sales


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Marketing and Sales Is marketing research effectively used to identify customer segments?

Are sales and promotion innovative?

Have alternative channels of distribution been evaluated?

Does the firm present an image of quality?

How brand loyal are the customers?

Customer Service How promptly and effectively are customer complaints handled?

Are our product warranty and guarantee policies appropriate?

How well does the firm provide replacement parts and repairservices?

Procurement Has the firm developed alternative sources for obtaining the

resources?

Are resources procured in a timely fashion? At lowest possible cost?At acceptable quality levels?

Has the firm established sound lon -term relationshi s with su liers?

Technology DevelopmentI th l ti hi b t R&D l d th d t t

Questions for Value Chain Analysis


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Is the relationship between R&D employees and other departmentsstorng?

Have the technology developments been able to meet the criticaldeadlines?

How successful have R&D activities been in product and processinnovations?

HR Management

How effective are the firms procedures for recruiting, selecting, andtraining?

Are there appropriate promotion policies in place, are they usedeffectively?

How appropriate are reward systems?

Firm Infrastructure Does the strategic planning system facilitate and enhance the

accomplishment of goals?

Can we obtain low cost funds?

Does IS provide timely and accurate information?

Resources, Capabilities, and Profits


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Relevant: Is the resource valuable? Scarce: Is the resource widely available?

Durability: How quickly is the advantage

depreciated? Mobility: Can the resource be bought and

sold or transferred?

Imitability: Is it hard to copy? Substitutability: Are there viable

alternatives

Resources, Capabilities, & Profits


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relevant scarce

durability

mobility

imitability

substitutability

Profit potential

Sustainability of profits


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YES

NO

ResourcesInputs to a firms

production process

Capability

Integration of ateam of resources

BETTER than

competitors?

CostLeadership

ORDifferentiation

A Non-Strategic

capability/resource

Sustainable

CompetitiveAdvantage

Business-LevelCorporate-Level

StrategiesPasses 6 criteriatest

YES


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Business Strategy &

Competitive Advantage

Agenda


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Agenda

Define key terms Business strategy

Competitive advantage

Competitive scope

Discuss Porters generic strategies

View and discuss M. Porter on

Competitive Strategy video series Discuss Best-Cost Strategy


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Competitive Advantage &Competitive Scope


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Competitive Scope

Competitive Advantage: The ability tooutperform rivals on profitability.

Cost advantage

Differentiation advantage Competitive Scope: The breadth of target

within which the firm seeks to gain a

competitive advantage. Broad scope

Narrow scope

The Generic Competitive Strategies


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Ma

rketTarge

t

Type of Advantage Sought

Broad Cost-Leadership

Strategy

BroadDifferentiation

Strategy

FocusedCost

Strategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

BroadRange of

Buyers

NarrowBuyerSegmentor Niche

Ivory Soap


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Ivory Soap

Introduced as a differentiated product

In 1950s positioned as the cost leader

What are the requirements to pursuedifferentiation advantage?

What are the requirements for cost

leadership? How did Ivory develop a significant costgap over its rivals?


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Generic Strategies


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Cost-Leadership /

Low-Cost Strategy

A generic business strategy

in which a businessproduces, at the lowest

cost possible, no-frills

products and services

industry-wide for a large

market

Cost

Differentiation

Ivory

Today


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Cost Leadership


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Unique position

What does it take to be the cost leader?

Good product

standard but acceptable quality

appeals to large percentage of themarket (broad cost leadership)

Opening up significant and sustainablecost difference

Command prices at or close to industryaverage

Securing a Cost Advantage


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Do a better job than rivals of

controlling the Cost Drivers

Approach 1

Redesign value chain to

bypass some cost-producing

activities

Approach 2 Controlcosts!

By-passcosts!

Approach 1: Controlling the CostDrivers


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Drivers

Capture scale economies Capture learning and experience curve effects

Manage costs of key resource inputs

Find sharing opportunities with other business units

Compare vertical integration vs. outsourcing

Assess first-mover advantages vs. disadvantages

Control percentage of capacity utilization

Make wise strategic choices related to operationsE.g. Product features, Mix & variety of products, Service levels, Wage levels


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Other requirements for Cost-Leadership


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Leadership

Access to capital Process engineering skills

Close supervision, detailed job

specifications, high formalization Compensation and rewards based on

quantitative targets

Strengths in manufacturing, distribution,technology, and managerial control.

Low-Cost Characteristics


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Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs Programs promoting continuous cost

improvement

Investments in cost-saving improvements

Risks of Low-Cost Strategy


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gy

Preoccupation with cost reduction cancause the firm to miss required product ormarketing changes.

Technological breakthroughs caneliminate cost advantages of the costleader.

Effective Cost Leaders can MITIGATE theFiveForces to remain profitable


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Threat ofNew

Entrants

Bargaining

Power of

Suppliers

Threat of

Substitute

Products

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Can mitigate Supplier Power by:

Low cost position makes them betterable to absorb cost increasesMore likely to make very largepurchases which reduces chance of

supplier power

Well positioned relative to Substitutes in

order to:

Lower prices to maintain value position

Can frighten off New Entrants due to

the need to:

Enter at Large Scale to be CostCompetitive

Take time to move down the LearningCurve

Can mitigate Buyer Power by:

Driving prices far below competitorswhich may cause exit and shift power

back to the firm

Effective Cost Leaders can also succeed INSPITE of unattractive FiveForces

Powerful Suppliers can:


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Threat ofNew

Entrants

Bargaining

Power of

Suppliers

Threat of

New Entrants cannot make a profit

compared to Low Cost Leader

Substitutes Place a Price Ceilingon the Industry.

LCL fit b tt th th

RivalsCant absorb costs of price

wars or marketing blitzes

as well as the LCL.

Powerful Buyers can:Demand Lower Prices

Demand Higher Quality

Bargaining

Power of

Buyers

Powerful Suppliers can:

Raise their Prices

Lower their Quality

LCL can absorb these COST

increases better than others as long as

the source of their cost advantage is

not based on inputs.

Notes for Midterm1

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