Midterm

Study guide:

Chapter 1 Introduction to Strategy

Understand the purpose of Strategy…what is your definition.

A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. 公司为获得和保持相对于竞争对手的卓越绩效而采取的一系列目标导向行动。

A unique strategic position – A successful combination of strategic activities

Not : 1. Grandiose statements; 2. A failure to face a competitive challenge; 3. Operational effectiveness, competitive benchmarking, or tactical tools; 4. Hope is not a strategy

Identify the three components that make up a GOOD strategy and how they relate to the AFI model

1. A diagnosis of the competitive challenge.

a) Analysis of the firm’s internal and external environments.

2. A guiding policy to address the competitive challenge.

a) Formulation.

b) Results in corporate, business and functional strategy.

3. A set of coherent actions to implement the firm’s guiding policy.

a) Implementation

Understand what it means to have a competitive advantage and how to make it sustainable

Superior performance relative to other competitors in the same industry or the industry average. 相对于同行业或行业平均水平的其他竞争对手而言更高级

To assess competitive advantage, benchmark:

Compare the firm to competitors in the same industry.

Compare the firm to the industry average.

How to gain competitive advantage:

Provide goods or services that:

Consumers value more highly than those of its competitors

Are similar to the competitors’ at a lower price

Competitive advantage has to come from:

Performing different activities or

Performing the same activities differently than rivals

Sustainable: A firm that is able to outperform its competitors or the industry average over a prolonged period. 能够长期超越竞争对手或行业平均水平的公司

Chapter 2 Strategic Leadership

Understand the importance of Stakeholders. Be able to describe the differences between internal and external stakeholders.

Organizations, groups, and individuals:

· Can affect or can be affected by a firm’s actions

· Have an interest in the performance or survival of the firm.

An integrative approach to managing a diverse set of stakeholders to gain and sustain competitive advantage.

Stakeholder management benefits firm performance:

· Cooperative stakeholders reveal important information 可从合作利益相关者获得重要信息

· Increased trust lowers business transaction cost 高信任度可降低业务交易成本

· Can lead to greater adaptability and flexibility 可带来更大的适应性和灵活性

· More predictable and stable returns 更可预测以及更稳定的情报

· Stronger reputation 更好的声誉

External Stakeholders	Internal Stakeholders
Customers Suppliers Alliance Partners Creditors Unions Communities Governments Media	Employees Stockholders Board Members

Understand who makes decisions on where to compete, how to compete and how to implement. What are the components in a business strategy? Corporate/Business/Functional

Strategy Formulation

· The choice of strategy

· Where and how to compete

Strategy Implementation

· Organization, coordination, integration

· How work gets done

· The execution of strategy

Corporate Strategy

· Decide in which industries, markets and geographies their companies should compete

· Corporate executives:

· Create synergies across SBUs

· Decide whether to enter or exit industries and markets

· Set strategic objectives

· Allocate strategic objectives

· Allocate scarce resources among SBU

· Monitor performance

· Make adjustments to the portfolio as needed

Business strategy (SBU)

· Standalone division corporate

· Profit and loss responsibility

· Work with corporate to determine business strategy

· Cost leadership

· Differentiation

· Value innovation

· Functional Strategy

· Within each strategic business unit: Accounting, Finance, HR, Product development, Operations, Manufacturing, Marketing, Customer service

· Functional managers are responsible for decisions and actions within the function.

Understand the differences between vision, mission and values. What purpose do they each serve?

Vision: What do we want to accomplish ultimately

· Captures and organization’s aspiration

· Spells out what the organization wants to accomplish, (“to” is a common word)

· Identifies the long-term objective

· Should be forward-looking and inspiring

An effective vision:

· Is expressed as a statement

· Should be forward-looking and inspiring

· Should provide meaning for employees in pursuit of the organization’s ultimate goals.

Vision and competitive advantage

· Research shows that vision statements and firm performance are related.

· This relationship is strongest when:

· The vision is customer oriented

· Internal stakeholders help define the vision

· Organizational structures align to the vision

Customer oriented vision statement	Product oriented vision statement
Allow companies to adapt to changing environments Focus on problem solving for the customer Defines a business in terms providing solutions to customer needs · Customer needs may change · The means of meeting those needs may change also	Focus on improving existing products and services Defines a business in terms of a good or service provided · Forces managers to take a more myopic view · Can hinder understanding of the competitive landscape

Vision is strategic intent

· Outlines a firm’s stretch goal. Is based on a firm’s vision

· Actions based on vision will

· Build necessary resources

· Build capabilities

· Ensure continuous organizational learning

· Ensure learning form failure

Mission: What an organization actually does

· The products and services it will provide

· The markets in which it will compete

Defines how the vision is accomplished

Credible actions that back up the vision and mission statements.

These commitments are often

· Costly

· Long-term oriented

· Difficult to reverse

Values: What commitment do we make? What safeguards do we put in place? How do we act both legally and ethically as we pursue our vision and mission?

Organizational core values:

· Ethical standards and norms

· Govern the behavior of individuals

· Provide stability to the strategy

· Serve as guardrails to keep the company on track

Help employees:

· Understand the company culture

· Deal with complexity

· Resolve conflict

Chapter 3 External Analysis

Understand a firm’s macro-environment using the PESTEL model. Be able to provide an example of each of the components.

Why is it important for an organization to study and understand its external environment? It is important because it can affect the industry and firm’s performance.

The PESTEL framework, for instance, is helpful because it acts as a guide, allowing managers to mitigate threats and leverage opportunities accordingly.

The Firm within Its External Environment, Industry, and Strategic Group.

PESTEL: Acts as a guide, allowing managers to mitigate threats & leverage opportunities accordingly.

· Managers mitigate threats and exploit opportunities by analyzing the external environmental forces.

· Factors are interdependent

· Framework to scan, monitor, and evaluate important external factors/tends impacting a firm in its quest for competitive advantage.

· Results are used in SWOT analysis

Political Factors:

· Processes and actions of government bodies that influence the firm can be shaped through: lobbying, public relations, contributions, litigation

· Political and legal forces are closely related. Political pressure often results in changes in legislation.

Economic Factors:

· Largely macroeconomic.

· Affect economy-wide phenomena.

· Example: Growth rate; Levels of employment; Interest rates; price stability; currency exchange rates.

Sociocultural Factors:

· Society’s cultures, norms, and values: are constantly in flux; differ across groups; trends should be monitored.

· Demographic trends: Population characteristics; Age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.

Technological Factors:

· Application of knowledge: new processes and products.

· Innovations in process technology: lean manufacturing, six sigma quality and biotechnology.

· Innovations in product technology: smartphones, wearable devices, all-electric cars.

· Advances in artificial intelligence and machine learning.

Ecological Factors:

· Broad environmental issues: Natural environment; Global warming; Sustainable economic growth.

· The relationship between organizations and the environment can be: Adversarial; Can provide business opportunities.

Legal Factors:

· Official outcomes of political processes: Laws; Mandates; Regulations; Court decisions.

· Many industries have been deregulated: Airlines, telecom, energy, and trucking.

Understand a firm’s profit potential within an industry by using Porter’s Five Forces model that shape competition: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat of substitutes, and (5) rivalry among existing competitors.

Two key insights about Five Forces Model:

· Competition is viewed more broadly in the five forces model

· Profit potential is a function of five competitive forces

The stronger the five forces, the lower the industry’s profit potential – make the industry less attractive for competitors.

The Weaker the five forces, the greater the industry’s profit potential – making the industry more attractive.

The threat of entry is high when:

· ✓The minimum efficient scale to compete in an industry is low.

· ✓Customer switching costs are low.

· ✓Capital requirements are low.

· ✓Incumbents do not possess:

· Brand loyalty.

· Proprietary technology.

· Preferential access to raw materials.

· Preferential access to distribution channels.

· Favorable geographic locations.

· Cumulative learning and experience effects.

· ✓Restrictive government regulations do not exist.

· ✓New entrants expect that incumbents will not or cannot retaliate.

The power of suppliers is high when:

· ✓Supplier’s industry is more concentrated than the industry it sells to.

· ✓Suppliers do not depend heavily on the industry for their revenues.

· ✓Incumbent firms face significant switching costs when changing suppliers.

· ✓Suppliers offer products that are differentiated.

· ✓There are no readily available substitutes for the products or services that the suppliers offer.

· ✓Suppliers can credibly threaten to forward-integrate into the industry.

The power of buyers is high when:

· ✓There are a few buyers, and each buyer purchases large quantities relative to the size of a single seller.

· ✓The industry’s products are standardized or undifferentiated commodities. (airfares)

· ✓Buyers face low or no switching costs. (Wireless providers)

· ✓Buyers can credibly threaten to backwardly integrate into the industry.

The threat of substitutes is high when:

· ✓The substitute offers an attractive price-performance trade-off.

· ✓The buyer’s cost of switching to the substitute is low.

The rivalry among existing competitors is high when:

· ✓There are many competitors in the industry. (Soda)

· ✓The competitors are roughly of equal size.

· ✓Industry growth is slow, zero, or even negative. (Wireless carriers)

· ✓Exit barriers are high.

· ✓Incumbent firms are highly committed to the business.

· ✓Incumbent firms cannot read or understand each other’s strategies well.

· ✓Products and services are direct substitutes.

· ✓Fixed costs are high and marginal costs are low.

· ✓Excess capacity exists in the industry.

· ✓The product or service is perishable.

Explain how competitive industry structure shapes rivalry among competitors. Perfect, Monopolistic Competition, Oligopoly and Monopoly

Perfect - When there are many small firms offering a commodity product in an industry that is easy to enter, no one is able to increase prices and generate profits.

Monopolistic competition: The computer hardware industry provides one example of monopolistic competition. Many firms compete in this industry, and even the largest of them (Apple, ASUS, Dell, HP, or Lenovo) have less than 20 percent market share. Moreover, while products between competitors tend to be similar, they are by no means identical.

Oligopoly: The express-delivery industry is an example of an oligopoly. The main competitors in this space are FedEx and UPS. Any strategic decision made by FedEx (e.g., to expand delivery services to ground delivery of larger-size packages) directly affects UPS; likewise, any decision made by UPS (e.g., to guarantee next-day delivery before 8:00 a.m.) directly affects FedEx. Other examples of oligopolies include the soft drink industry (Coca-Cola vs, Pepsi), airframe manufacturing business (Boeing vs. Airbus), home-improvement retailing (The Home Depot vs. Lowe’s), toys and games (Hasbro vs. Mattel), and detergents (P&G vs. Unilever). When there are only two main competitors, it’s called a duopoly and is a special case of oligopoly.

Monopoly: Utilities or Satellite radio…the only supplier..

Understand the purpose of Strategic Group Mapping

Strategic groups differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, market segments, distribution channels, and customer service. 

How to create a Strategic Group Model:

1. Identify the important strategic dimensions.

· Examples: expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service.

2. Choose two key dimensions for horizontal and vertical axis.

3. Graph the firms in the strategic group.

· Each firm’s market share indicated by the size of the bubble.

Chapter 4 Internal Analysis

What is a core competency?

Embedded Strengths Enabling Value-Creation

· Unique strengths…embedded deep within a firm…that allows the firm to differentiate from rivals.

· Results in creating higher value for the customer

· Results in products and services offered at lower cost.

· Expressed through structures, processes, routines.

Understand the VRIO model. How does it help you identify your product or service against competitors

Tool for evaluating a firm’s resource endowments

To be the basis of a competitive advantage, resources must be:

· Valuable,

· Rare,

· Costly to Imitate

· Organized to capture the value of the resource*

*Of particular note is that the fourth characteristic is actually about the organization or firm itself rather than its resources.

According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria.

If the answer is “yes” four times to the attributes listed in the decision tree, only then is the resource in question a core competency that underpins a firm’s sustainable competitive advantage.

A resource is…

· Valuable if:

· It helps to exploit an opportunity or offset a threat.

· Rare if:

· Only one or a few firms possess it.

· Costly to Imitate if:

· Competitors can’t develop the resource for a reasonable price.

· The firm is organization to capture value through:

· Effective internal organizational structure and coordinating systems.

Differentiate among a firm’s resources, capabilities, core competencies, and activities.

· Resources: Any assets that a firm can draw on when formulating and implementing a strategy.

· Capabilities: Organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically.

· Activities: Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services. Examples include: order taking, the physical delivery of products, or invoicing customers

· Key point: core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company’s success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services. While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.

Compare and contrast tangible and intangible resources

Be able to conduct a SWOT analysis to combine external and internal analysis and derive strategic implications

· Synthesizes internal analysis of the company’s strengths and weaknesses with those from an analysis of external opportunities and threats

· SWOT = VRIO framework + PESTEL + Porter’s five forces

· SO- how to manage strengths to take advantage of opportunities?

· ST- how to use strengths to reduce likelihood and impact of threats?

· WO-how to overcome weaknesses that prevent firm from taking advantage of opportunities?

· WT-how to overcome weaknesses that make threats a reality?

Chapter 5 Competitive Advantage, Firm Performance, Business Models

Understand the three traditional frameworks used to determine a firms performance. And what metrics are used for measurement?

Three traditional frameworks to measure and assess firm performance:

Accounting profitability.

· What is our accounting profitability?

· Uses standard financial metrics.

· Accurately assesses firm performance.

· Compares firm performance to competitors / industry average.

· One of the most commonly used metrics in assessing firm financial performance is return on invested capital (ROIC), where ROIC = Net profits / Invested capital. ROIC is a popular metric because it is a good proxy for firm profitability. In particular, the ratio measures how effectively a company uses its total invested capital, which consists of two components: (1) shareholders’ equity through the selling of shares to the public, and (2) interest-bearing debt through borrowing from financial institutions and bondholders.

· Does not consider off–balance sheet items:

· For example: pension obligations, operating leases.

· Focuses mainly on tangible assets:

· May not be the most important.

· Consider: innovation, quality, customer experience.

· This limitation of accounting data is nicely captured in the adage: Not everything that can be counted counts. Not everything that counts can be counted. Although accounting data capture some intangible assets, such as the value of intellectual property (patents, trademarks, and so on) and customer goodwill, many key intangible assets are not captured. Today, the most competitively important assets tend to be intangibles such as innovation, quality, and customer experience, which are not included in a firm’s balance sheets.

Shareholder value creation.

· What is our shareholder value?

· Stock price

· Stock prices can be volatile.

· Difficult to assess short-term firm performance.

· This is due to market volatility, external factors and investor sentiment.

· Macroeconomic factors affect stock prices.

· Economic growth or contraction.

· Unemployment, interest and exchange rates.

· Stock prices can reflect the mood of investors.

· Investors can be irrational.

Economic value creatio

· How much economic value does the firm generate?

· Difference between what a buyer is willing to pay and the cost to produce.

· The difference between:

· A buyer’s willingness to pay for a product / service and the firm’s total cost to produce it.

· The difference between value (V) and cost (C).

From an economic context, strategy is about:

1. Creating economic value and

2. Capturing as much of it as possible

A large difference between V and C gives the firm two distinct pricing options:

1. Charge higher prices to reflect the higher product value and increase profitability

OR

2. Charge the same price as rivals and gain market share

The strategic objective is to maximize (V – C), which is the economic value created.

Understand the balanced scorecard tool managers use to develop strategic objectives. What are the four key questions asked? What specific areas are you looking?

Balanced scorecard:

· Managers tool which harnesses multiple internal and external performance metrics in order to balance financial and strategic goals

· Brainstorming answers to these questions ideally results. In measures that give managers a quick but also comprehensive view of the firm’s current state. The four key questions are:

· How do customers view us?

· How do we create value?

· What core competencies do we need?

· How do shareholders view us?

· Customers:

· Revenue, profit, customer satisfaction.

· Value Creation, (Learning):

· Competitiveness, innovation, organizational learning.

· Core Competencies, (Internal):

· Key business processes.

· Shareholders, (Financial):

· Cash flow, operating income, ROIC, ROE, total returns to shareholders.

Advantage on using Balanced scorecard tool:

· Links strategic vision to responsible parties.

· Translates vision into measurable goals.

· Designs and plans business processes.

· Implements feedback and organizational learning.

· Alerts to needed strategic goal adaptation.

Disadvantage on using Balanced Scorecard tool

· Focused on implementation, not formulation

· How to get back on track if deviations occur?

· Lacks guidance:

· Which metrics to use?

· How to address setbacks?

Understand the Triple Bottom Line and its three dimensions—economic, social, and ecological, (profits, people, planet). How does TBL lead to a sustainable strategy?.

Focus: economic, social and ecological performance.

Three dimensions:

· Profits: Economic Dimension.

· People: Social Dimension.

· Planet: Ecological Dimension.

Rather than emphasizing sustaining a competitive advantage over time, sustainable strategy means a strategy that can be pursued over time without detrimental effects on people or the planet. Using renewable energy sources such as wind or solar power, for example, is sustainable over time. It can also be good for profits, or, simply put, “green is green,” as Jeffrey Immelt

Economic, social and ecological dimensions make up the triple bottom line.

Noneconomic factors can have a significant impact on a firm’s financial performance, as well as its reputation and goodwill.

Extended producer responsibility – In anticipation of government regulation – proactively addressing social or ecological issues

Understand the translation of a firm’s strategy (where and how to compete for competitive advantage) into action takes place in the firm’s business model (how to make money)

· A plan that details the firm’s competitive tactics and initiatives.

· A business model explains how the firm intends to make money AND how the firm conducts its business with buyers, suppliers, and partners.

· Business model innovation may be more important in achieving superior performance than product or process innovation.

How companies do business can sometimes be as important, if not more so, to gaining and sustaining competitive advantage as what they do. Indeed, a slight majority (54 percent) of senior executives responded to a recent survey stating that they consider business model innovation to be more important than process or product innovation. This is because product and process innovation is often more costly, is higher risk, and takes longer to come up with in the first place and to then implement. Moreover, business model innovation is often an area that is overlooked in a firm’s quest for competitive advantage, and thus much value can be unlocked by focusing on business model innovation.

Identify common business models: razor– razor-blade, subscription-based, pay-as-you-go, and freemium.

· Razor-razorblades: pay for replacements.

· Subscription: pay for access.

· Pay as you go: pay for what you consume.

· Freemium: pay for extra features / add-ons.

Chapter 6 Business Level Strategy

Define business-level strategy and describe how it determines a firm’s strategic position. Differentiation and cost leadership are two distinct strategic positions. Value Innovation or Integration is a third strategic position and explain why it is so hard to succeed.

A successful strategy:

· Leverages the firm internal strengths.

· Mitigates internal firm weaknesses.

· Exploits external opportunities.

· Avoids external threats.

There is no single correct business strategy for a specific industry.

Choose a strategy that:

· Provides a strong position that attempts to maximize economic value creation.

· Is effectively implemented.

Goal-directed actions:

· The goal-directed actions managers take in their quest to achieve a competitive advantage in a single product market.

· “How should we compete?”

· Who: which customer segments?

· What: customer needs will we satisfy?

· Why: do we want to satisfy them?

· How: will we satisfy our customers’ needs?

· To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by industry and firm effects.

· Choices between a cost OR value position.

· Tension between value creation and pressure to keep cost in check.

· Purpose to maximize the firm’s:

· Economic value creation.

· Profit margin.

· Value Innovation Accomplished through Simultaneously Pursuing Differentiation (V ↑) and Low Cost (C ↓) Successful value innovation requires that a firm’s strategic moves lower its costs and also increase the perceived value for buyers. Lowering a firm’s costs is primarily achieved by eliminating and reducing the taken-for-granted factors that the firm’s industry rivals compete on. Perceived buyer value is increased by raising existing key success factors and by creating new elements that the industry has not offered previously.

·

Understand the differences between a differentiation strategy and a cost leadership strategy. And be able to identify value drivers and cost drivers. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and the cost-leadership strategy.

· Differentiation: Unique features that increase value, so that consumers pay a higher price.

· Seeks to create higher value vs. competitors.

· Offers unique features.

· Charges higher prices.

Value drivers:

· The focus of competition:

· Unique product features.

· Service.

· New product launches.

· Marketing and promotion.

· Complements

· Focused on adding value

· Unique features

· Customer service

· Complements (add value to a product or service when they are consumed in tandem).

· Can increase costs through R&D and whatever innovation is needed.

· Cost Leadership:

· Seeks to create similar value vs. competitors.

· Charges lower prices.

· Goals:

· Reduce cost below competitors.

· Offer adequate value.

· Reduce prices for customers.

· Optimize the value chain for low cost.

· Managers can manipulate cost drivers to keep costs low

· Cost of input factors:

· Raw materials, capital, labor, and IT services.

· Economies of scale:

· Decreases in cost per unit as output increases.

· Learning-curve effects:

· Less time to produce output with experience.

· Experience-curve effects:

· Improvements to technology & production processes

· These two business strategies are called generic strategies because they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context. Differentiation and cost leadership require distinct strategic positions, and in turn increase a firm’s chances to gain and sustain a competitive advantage.

Understand what a Blue Oceans strategy entails.

A strategy that combines both differentiation and cost-leadership activities.

· A firm offers a differentiated product or service at a low cost.

· Ex: Trader Joe’s, Cirque du Soleil.

Uses value innovation to reconcile trade-offs.

Blue oceans represent:

· Untapped market space.

· Creation of additional demand.

· Opportunities for highly profitable growth.

· Disruption!!!

Blue Oceans are uncontested market spaces such as: new customer segments for or reconceptualization of existing products, or novel recombination of product attributes. The Strategy Canvas can help identify blue ocean strategies by exploring new combinations of product attributes.