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

• sources: dividend payments and capital appreciation in value of company´s shares

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, which is achieved by:

—> selling products in rapidly growing markets

—> gaining market share from rivals

—> selling more to existing customers

—> expanding internationally or diversifying into new businesses

return of invested capital (net profit divided by capital invested)

profitability and profit growth

—> in order to boost them, managers must:

• use strategies to give their company a competitive advantage over rivals

• deliver high profitability and sustainable profit growth

Effectiveness of strategies influences profitability (ROIC) and profit growth, which both influence shareholder value

The achieved advantage over rivals when a company’s profitability 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, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics

• develop functional strategies to fulfill strategic objectives set by business- and corporate-level general managers

• provide information that helps formulate realistic and attainable strategies

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

▪ Chief executive officer (CEO), other senior executives, and corporate staff

▪ Oversee the development of strategies for the entire organization

▪ Provide a link between people who oversee the firm’s strategic development and the shareholders

▪ Ensure that business strategies pursued by the company are consistent with superior profitability and profit growth

▪ Heads of business units

• Business unit - self-contained division that provides a product or service for a particular market

▪ Translate statements and intents from corporate level into concrete strategies for individual businesses

▪ Are concerned with strategies specific to a particular business

▪ Responsible for specific business functions

▪ Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers

▪ Provide information that helps formulate realistic and attainable strategies

1. Select the corporate mission and goals

2. Analyze the organization’s external competitive environment; identify opportunities and threats

3. Analyze the internal operating environment; identify strengths and weaknesses

4. Select organizational strategies that:

• build on strengths and correct weaknesses • are consistent with the mission and major goals

• are congruent and constitute a viable business model

5. Implement the strategies

• Exsisting Business Model

• Mission, Vision, Values and Goals

• External Analysis: Opportunities and Threats - SWOT - Internal Analysis: Strenghs and Weaknesses

• Business-Level Strategies

• Functional-Level Strategies

• Strategy and Technology

• Corporate-Level Strategies

• Implementing Strategies trough Organization

▪ Mission - Purpose of the company, or a statement of what the company strives to do

▪ Vision - Articulation of a company’s desired achievements or future state (e.g. we want 50% market share)

▪ Values - Statement of how employees should conduct themselves and their business to help achieve the company mission (corporate culture)

▪ Major goals - Goal: Precise, measurable, desired future state that a company attempts to realize

Defining Business

• Who is being satisfied? - Customer Groups

• What’s being satisfied? - Customer needs

• How are customer needs being satisfied? - Distinctive competencies

—> Business Definition

• External analysis identifies strategic opportunities and threats that will affect how an organization pursues its mission.

  • Involves examination of the:

    • industry environment in which the company operates

    • country or national environment

    • socioeconomic or macroenvironment

• Internal analysis focuses on reviewing the resources, capabilities, and competencies of a company (what do I have and how do I built these up?)

  • GOALS: identify the company’s strenghs and weaknesses

—> combine external and internal

• SWOT analysis - Comparison of strengths, weaknesses, opportunities, and threats

• Purpose - Identify the strategies to:

  • exploit external opportunities

  • build on and protect company strengths

  • counter threats and weaknesses

• Goals - Create or fine-tune a company-specific business model

  • → To align, fit, or match a company’s resources and capabilities to the demands of its environment

• Business-level strategies - Encompass the business’s overall competitive theme

  • How it positions itself in the marketplace to gain a competitive advantage

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

• Functional-level strategies - Directed at improving the effectiveness of operations within a company

• Corporate-level strategies determine:

  • the businesses a company should be in to maximize profitability and profit growth

  • how to gain a competitive edge

• Strategy implementation

  • Taking action at the functional, business, and corporate levels to execute a strategic plan

  • Designing the best organization structure, culture, and control systems to put a chosen strategy into action

• Feedback loop - Provides information to the corporate level on the:

  • Strategic goals that are being achieved

  • Degree of competitive advantage being created and sustained

—> In theory: Top-Down Process, in reality not

▪ Unpredictability of the real world

▪ Excessive importance is attached to the role of top management. While ignoring the role of lower-level managers

▪ Many successful strategies are a result of serendipity rather than rational strategizing

Emergent and Deliberate Strategies (mix of these in real world)

▪ Scenario planning - Formulating plans that are based on “what-if” scenarios about the future.

▪ Encourages managers to:

• think outside the box and be more flexible

• anticipate probable scenarios

▪ Correcting ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation

Cognitive biases - Systematic errors in human decision making that arise from the way people process information

• Prior hypothesis bias - Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong

• Escalating commitment - Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing

• Reasoning by analogy - Use of simple analogies to make sense out of a complex problem

• Representativeness - Tendency to generalize from a small sample or a single vivid anecdote that violates the statistical law of large numbers

• Illusion of control - Tendency to overestimates one’s ability to control events (general or top managers are more prone to this)

• Availability error - Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine

▪ Devil’s advocacy

• A member of a decision-making team identifies all the considerations that might make a proposal unacceptable

  • Possible perils of recommended courses of action are brought into light

Dialectic inquiry

• Generation of a plan and a counterplan that reflect plausible but conflicting courses of action − Promotes strategic thinking

Outside view

• Identification of past successful or failed strategic initiatives to determine whether they will work for the current project

▪ Vision, eloquence, and consistency

▪ Articulation of a business model ▪ Commitment

▪ Being well informed

▪ Willingness to delegate and empower

▪ Astute use of power

▪ Emotional intelligence

• Self-awareness, self-regulation, and motivation

• Empathy and social skills

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

The Cost of Goods Sold (COGS) is the total cost a business spends to make or buy the products it sells.

Think of it like this:

If you own a store that sells cookies, your COGS includes:

• The cost of ingredients (flour, sugar, chocolate chips).

• The cost of packaging.

• Any labor involved in baking the cookies.

It does not include things like rent, utilities, or marketing—that’s separate (those are operating expenses).

Formula:

COGS = Starting Inventory + Purchases During the Period - Ending Inventory

In simple terms, it’s the cost of everything directly related to the products you sold. It’s important because it helps calculate profit: Profit = Revenue - COGS - Other Expenses.

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

Firm-specific strengths that allow a company

to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage.

Physical entities, such as land, buildings, equipment, inventory, and money.

Nonphysical entities such as brand names, company reputation, experiential knowledge, and intellectual property, including patents, copyrights, and trademarks.

A company’s skills at coordinating its resources and putting them to productive use.

Activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service.

Activities of the value chain that provide inputs that allow the primary activities to take place.

Factors that make it difficult for a competitor to copy a company’s distinctive competencies.

The ability of an enterprise to identify, value, assimilate, and use new knowledge

Economies of scale occur when a business reduces its cost per unit as it increases production. These cost advantages arise because fixed costs are spread over a larger number of goods, and operational efficiencies are achieved as production scales up.

Types of Economies of Scale:

1. Internal Economies of Scale: Cost savings within a single firm.

   • Technical: Use of advanced machinery or technology.

   • Managerial: Specialization and division of labor.

   • Financial: Access to cheaper capital.

   • Marketing: Bulk buying or advertising.

   • Risk-bearing: Diversifying production or resources.

2. External Economies of Scale: Cost savings arising from the industry's growth as a whole.

   • Improved infrastructure.

   • Access to skilled labor in a specific location.

Example:

A car manufacturer produces 10,000 cars annually, reducing the cost per car because the same factory, labor, and machinery costs are divided across more units.

Economies of Scope

Economies of scope occur when a company saves costs by producing multiple types of products instead of focusing on just one. These savings arise because the same resources or capabilities can be used across different products.

Reasons for Economies of Scope:

• Shared resources (e.g., the same distribution channels or technology).

• Brand leverage (selling different products under the same brand).

• Diversification of risks.

Example:

A bakery that produces bread and cakes might share the same kitchen, ingredients, and staff for both, leading to lower average costs for each product.

Key Differences:

Both economies help firms achieve competitive advantages but in different ways—scale emphasizes quantity, while scope emphasizes diversity.

Opportunities - Elements in a company’s environment that allow it to formulate and implement strategies to become more profitable

Threats - Elements in the external environment that could endanger a firm’s integrity and profitability

▪ Industry - Group of companies offering products or services that are close substitutes for each other → Products or service satisfy the same basic customer needs

▪ Rival - A company’s closest competitor

▪ External analysis identifies the company’s industry

▪ Industry boundaries - Basic customer needs served by a market → Boundaries can change

• Potential competitors - Companies that are currently not competing in the industry but have the potential to do so

• Factors affecting the risk of entry by potential competitors:

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

  • Brand loyalty - Preference of consumers for the products of established companies

  • Absolute cost advantage - Enjoyed by incumbents in an industry and that new entrants cannot expect to match

  • Switching costs - Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant

  • Government regulations - Falling entry barriers due to government regulation results in significant new entry, increase in the intensity of industry competition, and lower industry profit rates

• Rivalry - Competitive struggle between companies within an industry to gain market share from each other

  • → Intense rivalry among established companies constitutes a strong threat to profitability

• Factors that impact the intensity of rivalry among established companies within an industry are:

  • Industry competitive structure - Number and size distribution of companies in it

  • Industry demand - Increasing demand moderates competition by providing greater scope for companies to compete for customers

  • Cost conditions - When fixed costs are high, profitability is highly leveraged to sales volume

  • Exit barriers - Economic, strategic, and emotional factors that prevent companies from leaving an industry

    • High exit barriers - Companies become locked into an unprofitable industry where overall demand is static or declining

• Buyers’ power to bargain down prices or raise costs by demanding better quality and service

• Bargaining power of buyers higher if:

  • buyers can choose sellers and purchase in large quantities

  • supplier industry is dependent on buyers for a major portion of sales

  • with low switching costs and ability to purchase input from several companies at once, buyers can pit companies against each other

  • buyers can threaten to enter the industry and produce the product

• Suppliers’ power to raise input prices or industry costs through various means

• Bargaining power of suppliers higher if:

  • product has few substitutes and is vital to the buyer • supplier is not dependent on one particular industry for their sales

  • companies would incur high switching costs if they moved to a different supplier

  • supplier can threaten to enter a customers’ industry

  • companies cannot enter their suppliers’ industry to lower prices

• Substitute products - Those of different businesses that satisfy similar customer needs

→ Limit the price that companies in an industry can charge for their product

• Complementors - Companies that sell products that add value to the other products

  • Strong complementors provide an increased opportunity for creating value

  • Weak complementors slow industry growth and limit profitability

• Companies in an industry differ in the way they strategically position products in the market

  • Product positioning is determined by the:

  • distribution channels and market segments served

  • product quality

  • technological leadership

  • customer service

  • pricing and advertising policy

  • promotions offered

• Since all companies in a strategic group pursue a similar strategy:

  • customers view them as direct substitutes for each other

  • immediate threat to a company are rivals within its own strategic group

• Different strategic groups have different relationships to each of the competitive forces

• Mobility barriers - Within-industry factors that inhibit the movement of companies between strategic groups

• Managers must:

  • determine if it is cost-effective to overcome mobility barriers

  • realize that companies in other strategic groups become their competitors if they overcome mobility barriers

• Embryonic stage - Development stage

• Growth is slow due to:

  • buyer’s unfamiliarity with the product and poor distribution channels

  • high prices due to companies’ inability to reap significant scale economies

• Barriers to entry are based on access to technological expertise

• Growth stage - First-time demand expands rapidly due to new customers in the market

• Prices fall since:

  • scale economies have been attained

  • distribution channels have developed

• Threat from potential competitors is highest at this stage

  • Rivalry is low - Companies are able to expand their revenues without taking market share away from other companies

• Shakeout stage - Demand approaches saturation levels

  • There are fewer potential first-time buyers

• Rivalry between companies intensifies

• Price war results in bankruptcy of inefficient companies and deters new entry

• 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

• 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

Corporate-level strategies should be chosen to promote the success of its business-level strategies

• This allows a firm to achieve a sustainable competitive advantage, leading to higher profitability

Levels of business model

• Business model and strategies for each business unit or division in every industry in which it competes

• Higher-level multibusiness model that justifies its entry into different businesses and industries

Horizontal integration - Acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations

Acquisition - Company uses its capital resources to purchase another company

Merger - Agreement between two companies to pool their resources and operations and join together to better compete in a business or industry

Lowers the cost structure

Increases product differentiation

Leverages a competitive advantage

Reduces rivalry within the industry

Increases bargaining power over suppliers and buyers

Difficult to implement

Conflict with regulatory authorities

• Increase in prices

• Abuse of market power

• Crushing potential competitors

Vertical integration - When a company expands its operations either backward or forward into an industry

• Backward vertical integration - Produces inputs for the company’s products

• Forward vertical integration - Uses, distributes, or sells the company’s products

Vertical integration increases product differentiation, lowers costs, and reduces industry competition when it:

• facilitates investments in efficiency-enhancing specialized assets

• protects product quality

• results in improved scheduling

Increasing cost structure

Disadvantages that arise when technology is changing fast

Disadvantages that arise when demand is unpredictable

Vertical disintegration - When a company decides to exit industries either forward or backward in the industry value chain to its core industry to increase profitability

Quasi integration - Use of long-term relationships, or investment into some of the activities normally performed by suppliers or buyers

—> In place of full ownership of operations that are backward or forward in the supply chain

Competitive bidding strategy - Independent component suppliers compete to be chosen to supply a particular component

Short-term contracts:

• last for a year or less

• do not result in specialized investments

• signal a company’s lack of long-term commitment to its suppliers

Strategic alliances - Long-term agreements between two or more companies to jointly develop new products or processes

• Substitute for vertical integration

• Avoids bureaucratic costs

Component suppliers benefit because their business and profitability grow as the companies they supply grow

Modularity – Degree to which a system’s components can be separated and recombined

Modular advantages

• Offers choices in function, design, scale, and features • Allows product variety with economies of substitution

Nonmodular (tightly integrated) advantages

• Components work better together

• Better monitoring of quality and reliability

Platform ecosystem - System of mutually dependent entities mediated by a stable core

More valuable than nonmodular when:

• customers and third-party options are diverse

• compatibility with third-party options is seamless • platform sponsor controls quality and architecture

More valuable than modular when:

• complements are non-routine purchases

• platform and complement integration increases performance. • important components require subsidization

Hostage taking - Means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain

Credible commitment - Believable promise or pledge to support the development of a long-term relationship between companies

Each company should possess a kind of power to discipline its partner, if the need arises

Parallel sourcing policy - A company enters into multiple long-term contracts with suppliers for components to prevent incidents of opportunism

Strategic outsourcing - Decision to allow one or more of a company’s value-chain activities to be performed by independent, specialist companies

Virtual corporation - Companies that pursue extensive strategic outsourcing to the extent that they only perform the central value creation functions that leads to competitive advantage

Lower cost structure

Enhanced differentiation

Focus on the core business

Holdup

• Risk that a company will become too dependent upon the specialist provider of an outsourced activity

Increased competition

• Building of an industrywide resource that lowers the barriers to entry in that industry

Loss of information and forfeited learning opportunities

Organizational architecture - The totality of a firm’s organizational arrangements, including its formal organizational structure, control systems, incentive systems, organizational culture, organization processes, and human capital

Organizational structure - The combination of the location of decision-making responsibilities, the formal division of the organization into subunits, and the establishment of integrating mechanisms to coordinate the activities of the subunits

Controls - The metrics used to measure the performance of subunits and make judgments about how well managers are running them

Incentives - The devices used to encourage desired employee behavior

Organization processes - The manner in which decisions are made and work is performed within the

organization

Organization culture - The norms and value systems that are shared among the employees of an organization

People - The employees of an organization, as well as the strategy used to recruit, compensate, motivate, and retain those individuals; also refers to employees’ skills, values, and orientation

Organizational structure can be thought of in terms of three dimensions:

• Vertical differentiation - The location of decision-making responsibilities within a structure, referring to centralization or decentralization, and also the number of layers in a hierarchy, referring the whether to organizational structure is tall or flat

• Horizontal differentiation - The formal division of the organization into subunits

• Integrating mechanisms - Processes and procedures used for coordination subunits

A firm’s vertical differentiation determines where in its hierarchy the decision-making power is concentrated

• Centralization - Structure in which the decision-making authority is concentrated at a high level in the management hierarchy

• Decentralization - Structure in which the decision-making authority is distributed to lower-level managers or other employees

Autonomous subunit - A subunit that has all the resources and decision-making power required to run the operation on a day-to-day basis

Limitations

• Accidentally distorted information

• Deliberately distorted information for personal agendas

• Increased expenses

• Difficult to change

Solutions

• Delayering - The process of reducing the number of levels in a management hierarchy

Functional structure - An organizational structure built upon the division of labor within the firm, with different functions focusing on different tasks

• Examples: a production function, an R&D function, a marketing function, a sales function, and so on

• A top manager or small top management team oversees these functions

• Most single businesses of any scale are organized along functional lines

Multidivisional structure - An organizational structure in which a firm is divided into divisions, each of which is responsible for a distinct business area

• Autonomous entities with their own functions and strategies

• Run their own daily operations as long as they hit performance targets

• Headquarters manages corporate-level strategy, helps with strategy, allocates capital, supervises division managers, and transfers knowledge between divisions

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Matrix structure - An organizational structure in which managers try to achieve tight coordination between functions, particularly R&D, production, and marketing

• High-technology firms based in rapidly changing environments sometimes adopt a matrix structure

• Dual hierarchy can lead to power struggles

• Can be difficult to ascertain accountability

• Can work with clear lines of responsibility

There is often a need to coordinate the activities of different functions and divisions within an organization to achieve strategic objectives

Formal integrating mechanisms used to coordinate subunits vary in complexity from simple direct contact and liaison roles to teams to a matrix structure

The greater the need for coordination between subunits (functions or divisions), the more complex the formal integrating mechanisms need to be

Informal integrating mechanisms - Knowledge networks that are supported by an organization culture that values teamwork and cross-unit cooperation

• Knowledge network - A network for transmitting information within an organization that is based not on formal organization structure but on informal contacts between managers within an enterprise and on distributed information systems

Control - The process through which managers regulate the activities of individuals and units so that they are consistent with the goals and standards of the organization

• Goal - A desired future state that an organization attempts to realize

• Standard - A performance requirement that the organization is meant to attain on an ongoing basis

• Subgoal - An objective, the achievement of which helps the organization attain or exceed its major goals

Personal control - Control by personal contact with and direct supervision of subordinates

Bureaucratic control - Control through a formal system of written rules and procedures

Output controls - Setting goals for units or individuals and monitoring performance against those goals

Market control - The regulation of the behavior of individuals and units within an enterprise by setting up an internal market for valuable resources such as capital

Incentives - The devices used to encourage and reward appropriate employee behavior.

When incentives are tied to team performance, as is often the case, they have the added benefit of encouraging cooperation between team members and fostering a degree of peer control

Peer control - The pressure that employees exert on others within their team or work group to perform up to or in excess of the expectations of the organization

Organizational culture - Specific collection of values and norms shared by people and groups in an organization

• Values - Ideas or shared assumptions about what a group believes to be good, right, and desirable

• Norms - Social rules and guidelines that prescribe the appropriate behavior in particular situations

Culture can exert a profound influence on:

• the way people behave within an organization

• decisions that are made

• things that the organization pays attention to • the firm’s strategy and performance

Strategy and organization in the single-business enterprise

• Single-business enterprises are typically organized along functional lines

• Need for integration varies depending on:

  • the business-level strategy of the firm

  • the nature of the environment in which the firm competes

The need for integration between functions is greater for firms that are competing through product development and innovation

In such organizations, there is an ongoing need to coordinate the R&D, production, and marketing functions of the firm to ensure that:

• new products are developed in a timely manner

• that they can be efficiently produced and delivered • that they match consumer demands

Low Integration

• Bureaucratic controls in the form of budgets are used to allocate financial resources to each function and to control

spending by the functions. Output controls will then be used to assess how well a function is performing

High Integration

• Bureaucratic controls will be used for financial budgets, and output controls will be applied to the different functions. Output controls will also be applied to cross-functional product development teams

Controls in a diversified firm with low integration

• Bureaucratic controls regulate the financial budgets and capital spending

• Output controls involve output targets for each division based on profitability, profit growth, and cash flow • Incentive controls tie managers’ incentives to the financial performance of their divisions

• Market controls allocate capital resources between different divisions

• Personal controls may be used within divisions

Controls in a diversified firm with high integration

• Firms use bureaucratic, output, incentive, and market controls

• Additional control problems

  • Firms need a control mechanism that induces divisions to cooperate for mutual gain

  • Firms must deal with performance ambiguities of tightly coupled divisions’ that share resources and depend on cooperation for better performance

• Cultural controls create values and norms across divisions