Macro

A set of related actions that managers take to increase their comapy’s performance

Creating competetive advantage through effective management of the strategy-making process

Selecting strategies based on analysis of an organization’s external and internal envrioment

Putting strategies into action

Equity capital for which there is no guarantee that stockholders will ever recoup their investment or earn a decent return.

Returns that shareholders earn from purchasing shares in a company

The return a company makes on the capital invested in the enterprise

profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy costumer needs

The increase in net profit over time

return of invested capital

profitability and profit growth

The aschieved advantage over rivals when a company’s profitabilaty is greater than the average profitability of firms industry

A company’s strategies enable it to maintain above-average profitability for a number of years

The conception of how strategies should work together as a whole to enable the company to achieve competitive advantage

its relative success in its industry and the overall performance of its industry relative to other industries

Managers who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions

Managers responsible for supervising a particular function, taht is, a task, activitx, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics

A company that competes in several different businesses and has created a seperate self-contained division to manage each.

A self-contained division (with its own function - e.g. finance, purchasing, production and marketing departement) that provides a product or service for a particular market

Knowledge of the internal rules, routines, and procedures of an organization that managers can leverage to achieve organizational objectives

The combination of the organizational structure of a company, its control systems, its incentive systems, its organizational culture, and its human capital strategy

Knowledge, research, and information that is owned by an individual or organization

VRIO framework - A framework managers use to determine the quality of a company’s resources, where V is value, R is rarity, I is inimitability, and O is for organization

How to evaluate company resources:

• Are they valuable?

• Are they rare?

• Are they inimitable?

• Is the company organized to exploit the resources?

Competitive advantage - When a company’s profitability is greater than the average profitability of all companies in its industry

Sustained competitive advantage - When a company maintains above-average profitability over a number of years

! Primary objective of strategy

Rare resources: Process knowledge and organizational architecture are rare because they are path-dependent through company history. Intellectual property is owned by the company

Barriers to imitation - Factors or characteristics that make it difficult for another individual or company to replicate something

• value customers place on its products

• price it charges for its products

• costs of creating those products

• raising prices to reflect the value

• reducing prices to induce more customers to purchase its products

• Consumer surplus - Customers capture some of the value placed on the good or service

• Customer’s reservation price - Each individual’s unique assessment of the value of a product

• Competition from rivals

The more value that consumers derive from a company’s goods or services, the more pricing options that company has

Activities related to a product’s design, creation, delivery, marketing, support, and after- sales service

- Research and development

• Design of products and production processes

• Superior product design increases a product’s functionality and add value

- Production

• Creation process of a good or service

• Helps lower cost structure and leads to differentiation

-Marketing and sales

• Brand positioning and advertising - Increase customers’ perceived value of a product • Help create value by discovering customers’ needs

-Customer service

• Provide after-sales service and support

• Create superior utility by solving customer problems and supporting customers after a purchase

▪ Demographic forces - Outcomes of changes in the characteristics of a population

▪ Social forces - Way in which changing social morals and values affect an industry

▪ Political and legal forces - Outcomes of changes in laws and regulations

Global forces - Falling barriers to international trade have enabled:

• domestic enterprises to enter foreign markets

• foreign enterprises to enter the domestic markets

Technological forces - Technological change can:

• make products obsolete

• create a host of new product possibilities

• impact the height of the barrier to entry and reshape industry structure

Life-cycle issues

• Industries do not always follow the pattern of the industry life-cycle model

• Time span of the stages vary from industry to industry

Innovation

• Punctuated equilibrium - Long periods of equilibrium are punctuated by periods of rapid change

Change

• Because competitive forces and strategic group models are static, they cannot capture periods of rapid

change in the industry environment when value is migrating

Company differences

• Overemphasize importance of industry structure as a determinant of company performance

• Underemphasize importance of variations among companies within a strategic group

Decline stage - Growth becomes negative due to:

• technological substitution

• social changes

• demographics

• international competition

Rivalry among established companies increases

Falling demand results in excess capacity

▪ Mature stage - Market is totally saturated, demand is limited to replacement demand, and growth is low or

zero

▪ Barriers to entry increase and threat of entry from potential competitors decreases

▪ Industries consolidate and become oligopolies

▪ Companies try to avoid price wars

Support activities - Provide inputs that allow the primary activities to take place

Materials management (logistics)

• Controls the transmission of physical materials through the value chain • Lowers cost and creates more profit

Human resources

• Ensures value creation by making sure that the company has the right combination of skilled people

Information systems

• Electronic systems to improve efficiency and effectiveness of a company’s value creation activities

Company infrastructure

• Companywide context within which all the other value creation activities occur

- Organizational structure, control system, incentive systems, and company culture

Efficiency

• Measured by the quantity of inputs required to produce a given output • Employee productivity - Output produced per employee

- Helps attain competitive advantage through a lower cost structure

Quality

• Superior quality - Customers’ perception that a product’s attributes provide them with higher utility than those sold by rivals

• Quality as excellence - Product features, functions, and level of service associated with its delivery

• Quality as reliability - When a product consistently performs the function it was designed for and seldom breaks down

Innovation

• Product innovation - Development of products that are new to the world or have superior attributes to existing

products

• Process innovation - Development of a new process for producing products and delivering them to customers

Customer responsiveness

• Superior responsiveness - Achieved by identifying and satisfying customer needs better than one’s rivals • Customer response time - Time that it takes for a good to be delivered or a service to be performed

• Other sources - Superior design, service, and after-sales service and support

DEF.

Total costs of producing products

Source

Income statement

Costs associated with selling products and administering the company

Source: income statement

Research and development expenditure

Source: income statement

Amount of money the company has to “work” with in the short term: Current assets – current liabilities

Source: Balance Sheet

Value of investments in the property, plant, and equipment that the company uses to manufacture and sell its products

Also known as fixed capital

Balance Sheet

Net profit expressed as a percentage of sales

Measures how effectively the company converts revenue into profits

Source: Ratio

Revenues divided by invested capital

Measures how effectively the company uses its capitals to generate

revenue

Source: Ratio

Net profit divided by invested capital

Source: Ratio

Total revenues minus total costs before tax

Source: Income Statement

Interest-bearing debt plus shareholders’ equity

Source: Balance Sheet

• Overall competitive theme of a business

- Whom a company decides to serve

- What customer needs and desires the company is trying to satisfy - How the company decides to satisfy those needs and desires

• Way a company positions itself in the marketplace to gain a competitive advantage

• Different positioning strategies that can be used in different industry settings

- Enables a company to:

• gain a competitive advantage in commodity markets • undercut rivals on price

• gain market share

• maintain or increase profitability

§ Distinguishing oneself from rivals by offering something that they find hard to match

Product differentiation is achieved through:

• superior reliability, functions, and features

• better design, branding, point-of-sale service, after sales service, and support

Advantages

• Allows a company to charge a premium price

• Helps a company to grow overall demand and capture market share from its rivals

Efficiency frontier

• Shows all the positions a company can adopt

with regard to differentiation and low cost

• Has a convex shape because of diminishing returns

Multiple positions on the differentiation-low cost continuum are viable

• Have enough demand to support an offering

To get to the efficiency frontier, a company must:

• pursue the right functional-level strategies

• be properly organized

• ensure its business-level strategy, functional-level strategy, and organizational arrangement align with each other

Value innovation - Occurs when innovations push out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost

than was thought possible

Enables a company to outperform its rivals for a long period of time

Market segmentation - Decision of a company to group customers, based on important differences in their needs, to gain a competitive advantage

• Standardization strategy - Producing a standardized product for the average customer, ignoring different segments

• Segmentation strategy - Producing different offerings for different segments, serving many segments or the entire

market

• Focus strategy - Serving a limited number of segments or just one segment

Generic business-level strategy - Gives a company a specific form of competitive position and advantage in relation to its rivals

• Broad low-cost strategy - Lowers costs to lower prices and still make a profit

• Broad differentiation strategy - Differentiates a company’s product in some way

• Focus low-cost strategy - Targets a niche and tries to be the low-cost player in that niche

• Focus differentiation strategy - Targets a niche and customizes offerings with features and functions

Achieve economies of scale and learning effects

Adopt lean production and flexible manufacturing technologies

Implement quality improvement methodologies to produce reliable goods

Streamline processes

Use information systems to automate business processes

Implement just-in-time inventory control systems

Design products with a focus on reducing costs

Increase customer retention

Ensure that the organization’s structure, systems, and culture reward actions that lead to:

• higher productivity

• greater efficiency

Customize product offering and marketing mix to different market segments

Design product offerings that have a high perceived quality regarding their:

• functions

• features

• performance

• reliability

Handle and respond to customer queries and problems promptly

Focus marketing efforts on:

• brand building

• perceived differentiation from rivals

Ensure employees act in a manner consistent with the company’s image

Create the right organizational structure, controls, incentives, and culture

Ensure that the control systems, incentive systems, and culture align with the strategic thrust

Successful companies build their competitive advantage by redefining their product offering through value innovation

->Creating a new market space.

Blue Ocean - Wide open market space where a company can chart its own course

To redefine its market and create a new business-level strategy, a company must:

• eliminate factors that rivals take for granted, and reduce costs

• reduce certain factors below industry standards, and lower costs

• raise certain factors above industry standards, and increase value

• create factors that rivals do not offer, and increase value

Functional-level strategies - Actions that improve the efficiency and effectiveness of one or more value creation activities

Used to build valuable resources to attain:

• Efficiency

• Quality

• Innovation

• Customer responsiveness

Efficiency - Measured by the quantity of inputs that it takes to produce a given output

Economies of scale - Reductions in unit costs attributed to a larger output

• Ability to spread fixed costs over a large production volume and produce in large volumes

->To achieve greater division of labor and specialization

Diseconomies of scale - Unit cost increases associated with a large scale of output

Managers should avoid being complacent about efficiency-based cost advantages derived from experience

effects as:

• neither learning effects nor economics of scale are sustained forever

• cost advantages gained from experience effects can be made obsolete by new technologies

Learning effects - Cost savings that come from learning by doing

The Impact of Learning and Scale Economies on Unit Costs

More significant when a technologically

complex task is repeated, as there is more to learn

Diminish in importance after a period of time

Triggered by changes in a company’s production system

Experience curve - Systematic lowering of the cost structure and consequent unit cost reductions

• Occur over the life of a product

A product’s per-unit production costs decline each time

its accumulated output doubles

• Accumulated output - Total output of a product since its introduction

Is important in industries that mass-produce a standardized output

Flexible production technology

• Reduces setup times for complex equipment

• Increases the use of individual machines through better scheduling • Improves quality control at all stages of the manufacturing process

->Increases efficiency and lowers unit costs

-> Enables better customization of product offerings

Mass customization - Use of flexible manufacturing technology to reconcile: • low cost

• differentiation through product customization

Marketing strategy - Position of a company with regard to pricing, promotion, advertising, product design, and distribution

• Impacts efficiency and cost structure

Customer defection (churn rate) - Percentage of a firm’s customers who defect every year to competitors

• Lowering customer defection helps achieve a lower cost structure

Materials management - Activities necessary to get inputs and components:

• to a production facility

• through the production process

• out through a distribution system to the end-user

Enormous potential for reducing costs

Just-in-time (JIT) inventory system

• Economizes on inventory holding costs by scheduling components to arrive:

- just in time to enter the production process

- as stock is depleted

• Cost savings come from increasing inventory turnover and reducing the need for working and fixed capital

• Drawback of leaving a company without a buffer stock of inventory

Supply chain management - Managing the flow of inputs and components from suppliers into the company’s production processes to:

• minimize inventory holding

• maximize inventory turnover

Research and development:

• boosts efficiency by designing products that are easy to manufacture

• develops process innovation with a new way that the production process can operate more efficiently

Human resource strategy

• Productive employees lower the costs of generating revenues and increasing return of sales

HR does this through:

• hiring strategy

• employee training

• self-managing teams • pay for performance

Information systems

• Impact on productivity affects all company activities

• Cost savings by:

- moving customer service and ordering online

- automating customer and supplier interactions

- reducing staff

- reducing physical stores

Infrastructure - Organizational structure, culture, style of leadership, and control systems.

• Strategic leadership is important in building commitment to efficiency

Total quality management - Increasing product reliability to perform consistently as designed and rarely break down

Five factors of TQM:

• Improved quality means that costs decrease

• As a result, productivity improves

• Better quality leads to higher market share, allowing the company to raise prices

• Higher prices increase profitability, allowing the company to stay in business

• Enables the company to create more jobs

Steps in quality improvement programs:

• Management should strive to eliminate mistakes, defects, and poor-quality

• Supervision quality should be improved

• Employees should not fear reporting problems or suggesting improvements

• Work standards should stress quality of work

• Employees should be trained in new skills to remain informed of workplace changes

• Everyone in the company should commit to achieving better quality

To achieve a perception of high quality of attributes the company should:

• collect marketing information indicating which attributes are most important to customers

• design products so that those attributes are embodied in the product

• decide significant attributes to promote and how best to position them in the minds of consumers

• recognize that competition is not stationary

Most important source of competitive advantage

Innovative products or processes give a company competitive advantage that allows it to:

• differentiate its products and charge a premium price

• lower its cost structure below that of its rivals

Successful new-product launches are catalysts of superior profitability

Demand for innovations is essentially uncertain

Technology is poorly commercialized

Poor positioning strategy

• Positioning strategy - Specific set of options adopted for a product based on price, distribution, promotion and advertising, and product features

Marketing a technology for which there is inadequate demand

Slow marketing of products

Tight, cross-functional integration can help a company ensure that:

• product development projects are driven by customer needs

• new products are designed for ease of manufacture

• development costs are controlled

• the time it takes to develop a product and bring it to market is minimized

• close integration between R&D and marketing is achieved

Give customers what they want, when they want it, and at a price they are willing to pay - within company profitability

• Focus on the customer

• Demonstrate leadership

• Shape employee attitudes

• Know customer needs

• Satisfy customer needs

First mover - Firm that pioneers a particular product category or feature by being first to offer it to the market

• Creation of a revolutionary product results in a monopoly position

First-mover advantage - Pioneering new technologies and products that lead to a competitive advantage (slowing the rate of imitation)

First-mover disadvantages - Competitive disadvantages associated with being first

Technical standards - Set of technical specifications that producers adhere to when making the product or component

Format wars - Battles to control the source of differentiation, and the value that such differentiation can create for the customer

Dominant design - Common set of features or design characteristics

Guarantees compatibility between products and their complements

Reduces confusion in the minds of consumers

Reduces production costs

Reduces risks associated with supplying complementary products

Leads to low-cost and differentiation advantages for individual companies

Helps raise the level of industry profitability

Standards emerge in an industry when the benefits of establishing a standard are recognized

Technical standards are set by cooperation among businesses, through the medium of an industryassociation

When the government sets standards they fall into the public domain

• Public domain - Any company can freely incorporate the knowledge and technology upon which the standard is based into its products

Network effects - Network of complementary products as a primary determinant of the demand for an industry’s product

Positive feedback loops - Increase in demand for a technology that triggers an increase in demand for products that support it

Alternative standards get locked out as consumers are unwilling to bear the switching costs

Make network effects work in one’s favor and against competitors

Build the installed base for the standard as rapidly as possible

Ensure a supply of complements

Leverage killer applications

• Killer applications - Applications or uses of a new technology or product so compelling that customers adopt them in droves, killing competing formats

Pursue aggressive pricing and marketing

• Razor and blade strategy - Pricing the product low to stimulate demand, and pricing complements high

Cooperate with competitors

License the format

Similar cost economics

• Very high fixed costs and very low marginal costs

Law of diminishing returns - Marginal costs rise as a company tries to expand output

Profitability increases when a company shifts from a cost structure with increasing marginal costs to higher fixed costs with lower marginal costs

Develop and market the innovation

Develop and market the innovation jointly with other companies

• Through a strategic alliance or joint venture

License the innovation to others and allow them to develop the market

Complementary assets

• Required to exploit a new innovation and gain a competitive advantage

• Help build brand loyalty and achieve rapid market penetration

Height of barriers to imitation

• The higher the barriers, the longer it takes for rivals to imitate

• Gives the innovator more time to build an enduring competitive advantage

Capable competitors

• Companies that can move quickly to imitate the pioneering company

• Competitors’ capability depends on their:

  • research and development skills (ability to reverse-engineer and develop a comparable product)

  • access to complementary assets (marketing, sales, manufacturing capabilities)

Technological paradigm shift - Shifts in new technologies that:

• revolutionize the structure of the industry

• dramatically alter the nature of competition

• require companies to adopt new strategies for survival

Occur in an industry when:

• established technology is approaching or is at its natural limit

• new disruptive technology has entered the marketplace and is invading the main market

Being aware of how disruptive technologies can revolutionize markets is a valuable strategic asset

Investing in new technologies that may become disruptive technologies

Creating an autonomous operating division solely for the disruptive technology

Do not face pressures to continue the existing out-of-date business model

Do not have to worry about established:

• customer base

• relationships with suppliers and distributors

Can focus their energies on the opportunities offered by the new disruptive technology

Must decide whether to partner with an established company or go solo