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Firm strategy should develop and exploit valuable, rare and costly-to-imitate resources, leading to sustained competitive advantage and above normal performance
Preliminaries
Strategy formulation, not implementation No silver bullet, magic formula A bit of luck Proactive vs. reactive
Barney) the way to achieve organizational objectives. (Hatten & Hatten) commitments and actions designed to exploit core competencies and gain competitive advantage. (Hitt, Ireland & Hoskisson) a plan that specifies which choices (the player) will make in every possible situation. (Von Neumann & Morgenstern)
with underlying economic processes, (2) creates value, and (3) is unique or rare.
Competitive parity - when strategy (1) is consistent with
underlying economic processes, (2) creates value, but (3) is not unique or rare
Competitive disadvantage when strategy fails to create
economic value.
Mission
Objectives
Strategies
Tactics
rivals
Objectives - Measurable performance targets, financial
and/or strategic
Strategies means, plans or commitments to achieve a
Tactics - Actions or policies to implement strategy Company Profile strengths and weaknesses of a firm Environmental Analysis opportunities, threats,
Mission Statements
Primary market or technology Goals: growth, profitability, survival Basic beliefs, company philosophy Public image, self-concept Customers Quality
Setting Objectives
Purpose of setting Objectives is to:
convert mission into performance targets create yardsticks to track performance establish goals that require stretch push firm to be inventive, focused
Setting Objectives
Set challenging but achievable objectives, but guard
Financial Objectives
Objectives that relate to improving firms financial
performance
Examples
increase ROI from 15% to 20% maintain AA bond rating increase earnings growth from 10% to 15% Other examples?
Strategic Objectives
Improvement in competitiveness or market position Examples
Increase market share from 15% to 18% Surpass rivals on customer service Achieve lower cost than competitors Achieve technological superiority Other examples?
Types of Strategies
Business strategies (competitive) Corporate strategies (alliances, M & A) Porters generic strategies the general strategic
Tactics
Actions to implement strategy Policies and procedures to get line employees to follow the
firms strategy
Messy issues of strategy implementation, not formulation
Measuring Performance
Organizational performance is a complicated concept multiple methods, each with different uses and flaws
Strategy fits firms environment Builds competitive advantage Improves strategy performance measures
Common measures of strategy performance
Change in firms market share Trend in profit margins relative to rivals or industry average Composite measures of financial strength Trend in firms stock price Firms reputation with its customers Product quality Service quality Employee satisfaction / morale
Current ratio
Quick ratio
Debt to assets
Debt to equity
Leverage Example
Assumptions: 50 shares outstanding Option A: borrow $100 @ 10 % Option B: sell 50 shares @ $2 Good Year Option A Option B Sales Cost of Goods Gross Profit Admin. Interest exp Net Profit Shares Outstanding Profit / share 100 65 35 10 10 15 50 0.30 100 65 35 10 0 25 100 0.25 Bad Year Option A Option B 80 52 28 10 10 8 50 0.16 80 52 28 10 0 18 100 0.18
Inventory turnover
Return on equity
Note:
these measures can be difficult to compute and more appropriate to finance than strategy. Our interest is in developing an intuitive understanding how they compare, contrast and can be used.
its operations + current assets + fixed assets - net other assets (other assets other liabilities) - non-interest bearing current liabilities (A.P.) Invested capital
Economic Profit
Reports, in dollar terms, the actual economic profit the firm
note:
ROIC and WACC are percentage terms. If the difference is positive, EP will also be positive.
firm market value of equity + market value of debt - economic book value MVA note: this measure is also difficult to calculate, especially determining the amount invested in the firm since inception.
Tobins q
Ratio of a firms market value to replacement cost of its
where
market value of common stock + market value of preferred stock + book value of short-term debt + book value of long=term debt firm market value
Mission
Objectives
Strategies
Tactics
Industry characteristics analysis Stakeholder analysis Porters Five Forces Model Competitor analysis
Industry Structure
Firm Conduct
Performance
Industry Structure
Firm Conduct
Price taking
Performance
Industry Examples?
Industry Structure
Firm Conduct
Performance
Industry Examples?
Industry Structure
Firm Conduct
Performance
Industry Examples?
Industry Structure
Firm Conduct
Performance
Industry Examples?
Market size Market growth rate Number and size of rivals Scope of rivalry Number and size of buyers Number and size of suppliers Substitute products Ease of entry / exit
Distribution channels Economies of scale Learning curve Capacity utilization Average industry profitability Pace of technological change
Stakeholder Analysis
People or groups who have an interest, claim, or stake in how well the firm performs shareholders employees suppliers unions general public managers customers government community
Threat of suppliers
Industry profitability
Threat of buyers
Threat of substitutes
Switching costs *
Access to distribution channels *
need Customer switching costs are low good examples butter vs. margarine calculators vs. slide rules tape b/u vs. CD burner bad examples Coke vs. Pepsi Honda vs. Toyota
cost
Unimportant to final quality of product
Product does not save the buyer money Buyer may integrate backward
Mission
Objectives
Strategies
Tactics
Networking
Hyper-competitive
Empty-core
Marketing and promotion aimed at brand recognition Expanding the product line Financial strength to accommodate growth Strong marketing channels
Industry Examples?
Product refinement extensions, packaging Emphasis on process innovation Lower costs Higher quality Differentiation / emphasis on service Horizontal integration International expansion
Industry Examples?
Market leadership Focus on growth segments niche strategy Emphasize production and distribution efficiency Gradually harvest the business Prune the product line Preferred customer selection Defer equipment maintenance and repair Divestment
Industry Examples?
Plotting a strategic group map: (1) Identify relevant dimensions (2) Locate firms (3) Group nearby firms (4) Look for potential opportunities
Q u a l i t y
Nike Asics NB
Converse Keds
Number of Models
Environmental Assessment
Monitoring early signals, changes or trends in the firms external environment; anticipating or forecasting these trends; assessing how these changes or trends will affect firm operations.
A firms strategy should exploit firm strengths while avoiding or correcting weaknesses
General managers their decisions have great impact Pros high appeal and validity Cons positive traits are ambiguous Institutional leadership - creates vision, organization and structure Pros intuition, strong appeal Cons sr. managers not only source of advantages
Little role for management Original, indestructible gifts of nature (land) Inelastic supply function High quality factors of production quantitative, testable theory numerous resources are inelastic natural shift in demand curve other contributing factors
Pros: Cons:
Other theories of the firm 4. Population Ecology 5. Transaction cost 6. Agency theory
Resource heterogeneity Resource immobility Firms are bundles of productive resources Financial capital Physical capital Human capital Organizational capital
competing firms
Imitability the degree that the resource can be duplicated
or substituted
Organization how the firm is structured, organized and
Valuable No
Rare --
Yes
Yes Yes
No
Yes Yes
-No Yes
Parity
Temporary Advantage Sustained Advantage
Normal
Above Normal Above Normal
imitate resources, rather than mimic other successful firms Relative cost of difficult to implement strategy should be compared to its value Socially complex resources can be source of competitive advantage Firms structure, control systems and compensation policies should change if they conflict with firm resources or capabilities
A cost-leadership strategy attempts to gain competitive advantage by reducing production or service costs below those of competitors
Diseconomies of scale
Physical limits to efficient size Managerial diseconomies Worker motivation Distance to markets and suppliers
Cost Leadership and VRIO Framework Which Sources of Cost Advantages Are Rare?
Learning curve
Cost Leadership and VRIO Framework Which Sources of Cost Advantages Are Costly to Duplicate?
Technological software
Costly to duplicate
History very likely very likely Somewhat likely -Somewhat likely ---
A product differentiation strategy attempts to gain competitive advantage by increasing the perceived value of products or services relative to that of the competition
Conceptual
Empirical
Product features Intra-firm linkages Timing Location Product mix Inter-firm linkages Reputation Product customization Product complexity Consumer marketing Distribution channels Service and support
Product Differentiation and VRIO Framework Which Bases Are Costly to Duplicate?
Reputation
Distribution channels
Costly to duplicate
Intra-firm linkages Timing Location Service and support Inter-firm linkages Product customization Product mix
Consumer marketing
Institutional control
The Cons..
Requires different
to increased sales, which lead to economies of scale, learning and other cost reductions
Empirical research supports
organizational structures
Management control systems
policy design
Strategic Alliances
Equity Alliance
Joint Venture
Cheating in Alliances
Adverse selection partner misrepresents skills and
abilities
Moral hazard partner has high quality skills and abilities,
Some examples
and substitution
Organization: to minimize cheating; the key to success
Strategy should neutralize threats, exploit opportunities and strengths, address firm weaknesses
Types of Strategies
Business level Corporate strategies
Generic Strategies
Strategies To Avoid
Follow the leader Hit another home run Arms race Do everything Losing hand / Sunk cost Stuck in the middle
Current or past strategy Degree of external dependence Attitudes toward risk Internal politics Timing Competitive reaction