3.5 Assignment: Capstone Project: Part 1 Assessment

TAKE-AWAY CONCEPTS

This chapter discussed two generic business-level strategies: differentiation and cost leadership. Companies can use various tactics to drive one or the other of those strategies, either narrowly or broadly. A blue ocean strategy attempts to find a competitive advantage by creating a new competitive area, which it does (when successful) by value innovation, reconciling the trade-offs between the two generic business strategies discussed. These concepts are summarized by the following learning objectives and related take-away concepts.

LO 6-1 / Define business-level strategy and describe how it determines a firm’s strategic position.

· Business-level strategy determines a firm’s strategic position in its quest for competitive advantage when competing in a single industry or product market.

· Strategic positioning requires that managers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost.

· Differentiation and cost leadership are distinct strategic positions.

· Besides selecting an appropriate strategic position, managers must also define the scope of competition—whether to pursue a specific market niche or go after the broader market.

LO 6-2 / Examine the relationship between value drivers and differentiation strategy.

· The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features.

· In a differentiation strategy, the focus of competition is on value-enhancing attributes and features, while controlling costs.

· Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements.

· Value drivers contribute to competitive advantage only if their increase in value creation (∆V) exceeds the increase in costs, that is: (∆V) > (∆C).

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LO 6-3 / Examine the relationship between cost drivers and cost-leadership strategy.

· The goal of a cost-leadership strategy is to reduce the firm’s cost below that of its competitors.

· In a cost-leadership strategy, the focus of competition is achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value.

· Some of the unique cost drivers that managers can manipulate are the cost of input factors, economies of scale, and learning- and experience-curve effects.

· No matter how low the price, if there is no acceptable value proposition, the product or service will not sell.

LO 6-4 / Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five forces that shape competition.

· The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability.

· Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage.

· Exhibit 6.8  details the benefits and risks of each business strategy.

LO 6-5 / Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

· To address the trade-offs between differentiation and cost leadership at the business level, managers must employ value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price, and cost.

· Lowering a firm’s costs is primarily achieved by eliminating and reducing the taken-for-granted factors on which the firm’s industry rivals compete.

· Increasing perceived buyer value is primarily achieved by raising existing key success factors and by creating new elements that the industry has not yet offered.

· Strategic leaders track their opportunities and risks for lowering a firm’s costs and increasing perceived value vis-à-vis their competitors by use of a strategy canvas, which plots industry factors among competitors (see  Exhibit 6.11 ).

LO 6-6 / Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

· A successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled.

· A blue ocean strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another.

· When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being “stuck in the middle.” They then succeed at neither business strategy, leading to a competitive disadvantage.

This chapter discussed various aspects of innovation and entrepreneurship as a business-level strategy, as summarized by the following learning objectives and related take-away concepts.

LO 7-1 / Outline the four-step innovation process from idea to imitation.

· Innovation describes the discovery and development of new knowledge in a four-step process captured in the four I’s: idea, invention, innovation, and imitation.

· The innovation process begins with an idea.

· An invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones.

· Innovation concerns the commercialization of an invention by entrepreneurs (within existing companies or new ventures).

· If an innovation is successful in the marketplace, competitors will attempt to imitate it.

LO 7-2 / Apply strategic management concepts to entrepreneurship and innovation.

· Entrepreneurship describes the process by which change agents undertake economic risk to innovate—to create new products, processes, and sometimes new organizations.

· Strategic entrepreneurship describes the pursuit of innovation using tools and concepts from strategic management.

· Social entrepreneurship describes the pursuit of social goals by using entrepreneurship. Social entrepreneurs use a triple-bottom-line approach to assess performance.

LO 7-3 / Describe the competitive implications of different stages in the industry life cycle.

· Innovations frequently lead to the birth of new industries.

· Industries generally follow a predictable industry life cycle, with five distinct stages: introduction, growth, shakeout, maturity, and decline.

· Exhibit 7.10  details features and strategic implications of the industry life cycle

LO 7-4 / Derive strategic implications of the crossing-the-chasm framework.

· The core argument of the crossing-the-chasm framework is that each stage of the industry life cycle is dominated by a different customer group, which responds differently to a new technological innovation.

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· There exists a significant difference between the customer groups that enter early during the introductory stage of the industry life cycle and customers that enter later during the growth stage.

· This distinct difference between customer groups leads to a big gulf or chasm, which companies and their innovations frequently fall into.

· To overcome the chasm, managers need to formulate a business strategy guided by the who, what, why, and how questions of competition.

LO 7-5 / Categorize different types of innovations in the markets-and-technology framework.

· Four types of innovation emerge when applying the existing versus new dimensions of technology and markets: incremental, radical, architectural, and disruptive innovations (see  Exhibit 7.11 ).

· An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering (existing market/existing technology).

· A radical innovation draws on novel methods or materials and is derived either from an entirely different knowledge base or from the recombination of the existing knowledge base with a new stream of knowledge (new market/new technology).

· An architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets (new market/existing technology).

· A disruptive innovation is an innovation that leverages new technologies to attack existing markets from the bottom up (existing market/new technology).

LO 7-6 / Explain why and how platform businesses can outperform pipeline businesses.

· Platform businesses scale more efficiently than pipeline businesses by eliminating gatekeepers and leveraging digital technology. Pipeline businesses rely on gatekeepers to manage the flow of value from end to end of the pipeline. Platform businesses leverage technology to provide real-time feedback.

· Platforms unlock new sources of value creation and supply. Thus they escape the limits faced by a pipeline company working within an existing industry based on physical assets.

· Platforms benefit from community feedback. Feedback loops from consumers back to the producers allow platforms to fine-tune their offerings and to benefit from big data analytics.

TAKE-AWAY CONCEPTS

In this chapter, we defined corporate strategy and then looked at two fundamental corporate strategy topics—vertical integration and diversification—as summarized by the following learning objectives and related take-away concepts.

LO 8-1 / Define corporate strategy and describe the three dimensions along which it is assessed.

· Corporate strategy addresses “where to compete.” Business strategy addresses “how to compete.”

· Corporate strategy concerns the boundaries of the firm along three dimensions: (1) industry value chain, (2) products and services, and (3) geography (regional, national, or global markets).

· To gain and sustain competitive advantage, any corporate strategy must support and strengthen a firm’s strategic position, regardless of whether it is a differentiation, cost-leadership, or blue ocean strategy.

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LO 8-2 / Explain why firms need to grow, and evaluate different growth motives.

· Firm growth is motivated by the following: increasing profits, lowering costs, increasing market power, reducing risk, and managerial motives.

· Not all growth motives are equally valuable.

· Increasing profits and lowering expenses are clearly related to enhancing a firm’s competitive advantage.

· Increasing market power can also contribute to a greater competitive advantage, but can also result in legal repercussions such as antitrust lawsuits.

· Growing to reduce risk has fallen out of favor with investors, who argue that they are in a better position to diversify their stock portfolio in comparison to a corporation with a number of unrelated strategic business units.

· Managerial motives such as increasing company perks and job security are not legitimate reasons a firm needs to grow.

LO 8-3 / Describe and evaluate different options firms have to organize economic activity.

· Transaction cost economics help managers decide what activities to do in-house (“make”) versus what services and products to obtain from the external market (“buy”).

· When the costs to pursue an activity in-house are less than the costs of transacting in the market (Cin-house < Cmarket), then the firm should vertically integrate.

· Principal–agent problems and information asymmetries can lead to market failures, and thus situations where internalizing the activity is preferred.

· A principal–agent problem arises when an agent, performing activities on behalf of a principal, pursues his or her own interests.

· Information asymmetries arise when one party is more informed than another because of the possession of private information.

· Moving from less integrated to more fully integrated forms of transacting, alternatives include short-term contracts, strategic alliances (including long-term contracts, equity alliances, and joint ventures), and parent–subsidiary relationships.

LO 8-4 / Describe the two types of vertical integration along the industry value chain: backward and forward vertical integration.

· Vertical integration denotes a firm’s addition of value—what percentage of a firm’s sales is generated by the firm within its boundaries.

· Industry value chains (vertical value chains) depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms compete.

· Backward vertical integration involves moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain.

· Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.

LO 8-5 / Identify and evaluate benefits and risks of vertical integration.

· Benefits of vertical integration include securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets.

· Risks of vertical integration include increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions.

LO 8-6 / Describe and examine alternatives to vertical integration.

· Taper integration is a strategy in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside-market firms for some if its distribution.

· Strategic outsourcing involves moving one or more value chain activities outside the firm’s boundaries to other firms in the industry value chain. Offshoring is the outsourcing of activities outside the home country.

LO 8-7 / Describe and evaluate different types of corporate diversification.

· A single-business firm derives 95 percent or more of its revenues from one business.

· A dominant-business firm derives between 70 and 95 percent of its revenues from a single business, but pursues at least one other business activity.

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· A firm follows a related diversification strategy when it derives less than 70 percent of its revenues from a single business activity, but obtains revenues from other lines of business that are linked to the primary business activity. Choices within a related diversification strategy can be related-constrained or related-linked.

· A firm follows an unrelated diversification strategy when less than 70 percent of its revenues come from a single business, and there are few, if any, linkages among its businesses.

LO 8-8 / Apply the core competence–market matrix to derive different diversification strategies.

· When applying an existing/new dimension to core competencies and markets, four quadrants emerge, as depicted in  Exhibit 8.9 .

· The lower-left quadrant combines existing core competencies with existing markets. Here, managers need to come up with ideas of how to leverage existing core competencies to improve their current market position.

· The lower-right quadrant combines existing core competencies with new market opportunities. Here, managers need to think about how to redeploy and recombine existing core competencies to compete in future markets.

· The upper-left quadrant combines new core competencies with existing market opportunities. Here, managers must come up with strategic initiatives of how to build new core competencies to protect and extend the firm’s current market position.

· The upper-right quadrant combines new core competencies with new market opportunities. This is likely the most challenging diversification strategy because it requires building new core competencies to create and compete in future markets.

LO 8-9 / Explain when a diversification strategy does create a competitive advantage and when it does not.

· The diversification-performance relationship is a function of the underlying type of diversification.

· The relationship between the type of diversification and overall firm performance takes on the shape of an inverted U (see  Exhibit 8.11 ).

· Unrelated diversification often results in a diversification discount: The stock price of such highly diversified firms is valued at less than the sum of their individual business units.

· Related diversification often results in a diversification premium: The stock price of related-diversification firms is valued at greater than the sum of their individual business units.

· In the BCG matrix, the corporation is viewed as a portfolio of businesses, much like a portfolio of stocks in finance (see  Exhibit 8.13 ). The individual SBUs are evaluated according to relative market share and the speed of market growth, and are plotted using one of four categories: dog, cash cow, star, and question mark. Each category warrants a different investment strategy.

· Both low levels and high levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance.

This chapter discussed two mechanisms of corporate-level strategy—alliances and acquisitions—as summarized by the following learning objectives and related take-away concepts.

LO 9-1 / Apply the build-borrow-or-buy framework to guide corporate strategy.

· The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).

· Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.

LO 9-2 / Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them.

· Strategic alliances have the goal of sharing knowledge, resources, and capabilities to develop processes, products, or services.

· An alliance qualifies as strategic if it has the potential to affect a firm’s competitive advantage by increasing value and/or lowering costs.

· The most common reasons firms enter alliances are to (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.

LO 9-3 / Describe three alliance governance mechanisms and evaluate their pros and cons.

· Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures.

· There are pros and cons of each alliance governance mechanism, shown in detail in  Exhibit 9.2  with highlights as follows:

· Non-equity alliance’s pros: flexible, fast, easy to get in and out; cons: weak ties, lack of trust/commitment.

· Equity alliance’s pros: stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment.

· Joint venture pros: strongest tie, trust/commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses).

LO 9-4 / Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

· An alliance management capability consists of a firm’s ability to effectively manage alliance-related tasks through three phases: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management.

· An alliance management capability can be a source of competitive advantage as better management of alliances leads to more likely superior performance.

· Firms build a superior alliance management capability through “learning by doing” and by establishing a dedicated alliance function.

LO 9-5 / Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.

· A merger describes the joining of two independent companies to form a combined entity.

· An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile.

· Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term mergers and acquisitions, or M&A.

· Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability.

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LO 9-6 / Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.

· Horizontal integration is the process of merging with competitors, leading to industry consolidation.

· As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation.

LO 9-7 / Explain why firms engage in acquisitions.

· Firms engage in acquisitions (1) to access new markets and distributions channels, (2) to access new capability or competency, and (3) for strategic preemption.

LO 9-8 / Evaluate whether mergers and acquisitions lead to competitive advantage.

· Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize.

· If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.

· Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal–agent problems, (2) the desire to overcome competitive disadvantage, and (3) the quest for superior acquisition and integration capability.

This chapter discussed the roles of MNEs for economic growth; the stages of globalization; why, where, and how companies go global; four strategies MNEs use to navigate between cost reductions and local responsiveness; and national competitive advantage, as summarized by the following learning objectives and related take-away concepts.

LO 10-1 / Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.

· Globalization involves closer integration and exchange between different countries and peoples worldwide, made possible by factors such as falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs.

· A multinational enterprise (MNE) deploys resources and capabilities to procure, produce, and distribute goods and services in at least two countries.

· Many MNEs are more than 50 percent globalized; they receive the majority of their revenues from countries other than their home country.

· Product, service, and capital markets are more globalized than labor markets. The level of everyday activities is roughly 10 to 25 percent integrated, and thus semi-globalized.

· Foreign direct investment (FDI) denotes a firm’s investments in value chain activities abroad.

LO 10-2 / Explain why companies compete abroad, and evaluate the advantages and disadvantages of going global.

· Firms expand beyond their domestic borders if they can increase their economic value creation and enhance competitive advantage.

· Advantages to competing internationally include gaining access to a larger market, gaining access to low-cost input factors, and developing new competencies.

· Disadvantages to competing internationally include the liability of foreignness, the possible loss of reputation, and the possible loss of intellectual capital.

LO 10-3 / Apply the CAGE distance framework to guide MNE decisions on which countries to enter.

· Most of the costs and risks involved in expanding beyond the domestic market are created by distance.

· The CAGE distance framework determines the relative distance between home and foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance.

LO 10-4 / Compare and contrast the different options MNEs have to enter foreign markets.

· The strategist has the following foreign-entry modes available: exporting, strategic alliances (licensing for products, franchising for services), joint venture, and subsidiary (acquisition or greenfield).

· Higher levels of control, and thus a greater protection of IP and a lower likelihood of any loss in reputation, go along with more investment-intensive foreign-entry modes such as acquisitions or greenfield plants.

LO 10-5 / Apply the integration-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.

· To navigate between the competing pressures of cost reductions and local responsiveness, MNEs have four strategy options: international, multidomestic, global-standardization, and transnational.

· An international strategy leverages home-based core competencies into foreign markets, primarily through exports. It is useful when the MNE faces low pressures for both local responsiveness and cost reductions.

· A multidomestic strategy attempts to maximize local responsiveness in the face of low pressure for cost reductions. It is costly and inefficient because it requires the duplication of key business functions in multiple countries.

· A global-standardization strategy seeks to reap economies of scale and location by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. It involves little or no local responsiveness.

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· A transnational strategy attempts to combine the high local responsiveness of a localization strategy with the lowest-cost position attainable from a global-standardization strategy. It also aims to benefit from global learning. Although appealing, it is difficult to implement due to the organizational complexities involved.

LO 10-6 / Apply Porter’s diamond framework to explain why certain industries are more competitive in specific nations than in others.

· National competitive advantage, or world leadership in specific industries, is created rather than inherited.

· Four interrelated factors explain national competitive advantage: (1) factor conditions, (2) demand conditions, (3) competitive intensity in a focal industry, and (4) related and supporting industries/complementors.

· Even in a more globalized world, the basis for competitive advantage is often local.