Strategy

A firm’s theory about how to gain

  competitive advantage

Eisner's Theory

People will pay a premium price for extraordinary

entertainment.  We have the necessary resources to

create extraordinary entertainment.  Therefore, let’s

redeploy our resources in a different way and offer

something extraordinary to people.

Strategic Management Process

A sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy (that is, a strategy that generates comp. advantages)

Mission

Firm's long term purpose

Strategic Management Process (pic)

                                 external analysis

mission > objectives >                            >strategic choice>strategy impl.>com adv

                                  internal analysis

Visionary Firms

Firms whose mission is central to all they do

Objectives

Specific, measurable targets a firm can use to evaluate the extent to which it is realizing its mission

External Analysis

Indentifying the critical threates and opportunities in its competitive environment

• interest rates
• demographics
• social trends
• technology

Internal Analysis

Helps a firm identify its organizational strengths and weaknesses. Helps a firm understand which of its resources and capabilities are likely to be sources of a competitive advantage.

• human resources (knowledge)
• manufacturing abilities
• technology

Business level strategies

Strategic choice to gain competitive advantages in a single market or industry. 

Corporate Level Strategies

Actions firms take to gain competitive advantage in multiple markets or industries simulataneously.

Strategic Choice

1. supports the firm's mission
2. consistent with the firm's objectives
3. exploits opportunities in a firm's environment with a firm's strengths
4. neutralizes threats in a firm's environment while avoiding a firm's weaknesses

Competitive Advantage

The ability to create more economic value than competitors.

• the result of doing something different and/or better than competitors

• there must be something different about a firm’s offering vis-à-vis competitors’ offerings

Economic Value

The difference between the perceived benefits gained by a customer that purchases a firm's products or services and the full economic cost of these products or services.

Competitive Parity

Firms that create the same economic value as their rivals

Accounting Performance

Measure of competitive advantage calculated by using information from a firm's published profit and loss balance sheet statements.

Elements of Strategy

1. Arenas
2. Vehicles
3. Differentiators
4. Staging
5. Economic Logic

Arenas

Where will we be active?

Which product categories?

Which market segments?

Which geographic areas?

Which core technologies?

Which value creation stages?

Vehicles

How will we get there?

Internal development?

Joint ventures?

Licensing/franchising?

Acquistions?

Differentiators

How will we win?

Image?

Customization?

Price?

Styling?

Product reliability?

Staging

How will we obtain our returns?

Lowest costs through scale advantages?

Lowest costs through scope and replication advantages?

Premium prices due to unmatchable service?

Premium prices due to proprietary product features?

Economic Logic

What will be our speed and sequence of moves?

Speed of expansion?

Sequence of initiatives?

Michael Eisner

Disney CEO

1. Increased admission prices at theme parks

2. Focused on movie studios (character development)

3. Diversified into TV (ABC), hotels, retail stores, sports teams, cruise line, etc.

Strategic Change of Disney

First Half Successes

Second Half Failures

1. Earnings per share dipped from 0.95 to -0.02

2. Pushed out executives and board members that provided checks and balances

3. Failed relationship w Pixar

4. Effects of 9/11 on theme parks

What influences strategists?

Stakeholders influence strategists across organizational boundaries.

Stakeholders

Individuals and groups who are potentially affected by an organization's activities and may attempt to influence its strategy

• vary in power and attentiveness
• affect how purpose is defined, resources are gathered and used and who benefits from this activity
• each one has unique perspecitve and may conflict, even within the firm

ex:local international community, owners, suppliers, customers, partners, employees, government, etc.

Synergies

Enable one resource to increase the impact of others

Tempory and Sustainable

• Comp advantage typically results in high profits
• profit attracts competition
• competition limits duration of competitive advantage

Therefore:

• most competitive advantage is temporary
• competitors imitate the advantage or offer something better

Sustainable Comp Advantage

IF:

• competitors are unable to imitate the source of advantage
• no one conceives of a better offering

Competitive Disadvantage

• people may have an aversion to what the firm offers
• firm may have a cost disadvantage
• firm may have outdated technology/equipment
• firm may have a negative reputation

Four assumptions of the I/O Model

1. External environment imposes pressures and constraints that determine strategies leading to above-average returns.

2. Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies.

3. Resources used to implement strategies are highly mobile across firms.

4. Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing).

I/O Model of Above-Average Returns

1. Strategy is dictated by the external environment of the firm - what opportunities exist in these environments?
2. Firm develops internal skills required by external environment - what can the firm do about the opportunities?

I/O Model Assumptions

Where the I/O Model Works

1.  Strategy is dictated by the firm's unique resources and capabilities.
2. Find an environment in which to exploit these assets (where are the best opportunities?)

Two Models for firms

Industrial Organization Model (I/O): Focuses on the environment outside the firm

Resource-Based Model: Focuses on the inside of the firm

Successful strategy formulation and implementation actions result only when the firm properly uses both models.

Emergent Strategies

Theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented.

General Environment

Consists of broad trends in the context within which a firm operates that can have an impact on a firm's strategic choices.

Consists of 6 interrelated elements:

technological change, demographic trends, cultural trends, economic climate, legal and political conditions, and specific international events.

Structure-Conduct-Performance (S-C-P) Model

Structure: measured by such factors as the number of cempetitors in an industry, the heterogeneity or products, the cost of entry and exit in an industry, and so forth

Conduct: refers to the strategies that firms in an industry implement

Performance:

1. The performance of individual firms and

2. performance of the economy as a whole

Why External Analysis?

I/O Model of Above-Average Returns

 Industrial Organizational (I/O) Model of Above-average Returns

External Environments

Six Factor or STEEP Analysis

Performing the STEEP Analysis

Importance: Overall, how important is each factor (H M L)

Impact: Overall, does each factor have a positive, negative, or neutral impact? (+ - 0)

Five Forces Model

Supplier Power

• Powerful suppliers can ‘squeeze’ (lower profits) the focal firm
• How many suppliers are there to serve your industry?
• How unique or differentiated are your suppliers’ products?
• Are your switching costs high if you decide to change suppliers?
• Are there substitute products you could use to replace suppliers’ products?
• Would your suppliers consider moving forward into your end of the industry value chain (e.g., moving into the retail end)?
• Do your suppliers serve other industries?

Buyer/Customer Power

• Powerful buyers can ‘squeeze’ (lower profits) the focal firm by demanding lower prices and/or higher levels of quality and service
• Are your buyers/customers concentrated or do they purchase in large volume? 
• Are the goods your buyers/customers purchase standard or undifferentiated? 
• Are switching costs high for your buyers/customers?
• Are your buyers/customers highly price or quality sensitive? 
• Would your buyers/customers ever consider supplying their own goods?
  

Entry Barriers

• Can your company take advantage of economies of scale? 
• Are there proprietary product/service differences? 
• Does your company have strong brand loyalty/brand equity?
• Are customers switching costs high? 
• Are capital requirements high? 
• Does your company have access to key distribution channels? 
• Does your company enjoy absolute cost advantages? 
• Is government policy favorable for new entrants? 
• Is it likely that current firms will retaliate against new entrants? 

Exit Barriers

• Does your company utilize a high degree of specialized assets? 
• Are fixed costs high? 
• Are there multiple strategic inter-relationships inside the firm (e.g., high degree of shared costs)? 
• Are there emotional attachments to the business? 
• Are there governmental or social reasons that discourage exit?

Threat of Substitutes

Intensity of Rivalry

High rivalry means firms compete vigorously—and compete away above average profits

Attractive Industry

• High threat of new entrants
• High supplier power
• High buyer/customer power
• High threat of substitutes
• High degree of rivalry

Unattractive Industry

• Low threat of new entrants
• Low supplier power
• Low buyer/customer Power
• Low threat of substitutes
• Low degree of rivalry

Competitor Analysis

• Who is/are your competitors?
• Drivers of competitive actions and responses: awareness, motivation and ability
• Competitive dynamics

Market Commonality

Concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual market to each.

Resource Similarity

The extent to which the firm's tangible and intangible resources are comparable to a competitor's in terms of both type and amount

Slow cycle markets

Those in which the firm's competitive advantages are shielded from imitation commonly for longer periods of time and where imitation is costly.

Fast cycle market

Those in which the firm's capabilities that contribute to competitive advantages aren't shielded from imitation and where imitation is often rapid and inexpensive

Economies of Scale

Exists in an industry when a firm's costs fall as a function of it's volume of production

Diseconomies of Scale

When a firm's costs rise as a function of its volume of production

Product Differentiation as Barrier to Entry

Brand identification and customer loyalty serve as entry barriers because new entrants not only have to absorb the standard costs associated w starting production, they also have to overcome the incumbent firm's differentiation advantages

Proprietary Technology

Secret or planted tech that gives incumbent firms important cost advantages over potential entrants

Managerial Know How

Includes info that has taken years, sometimes decades to accumulate, and enables the firm to interact w its customers and suppliers to be innovative and creative, to manufacture quality products, and so forth.

Forward Vertical Integration

When suppliers become a threat the the firm because they become rivals.

Backward Vertical Integration

When the buyer has incentive to enter supplier's market because the supplier is earning significantly more profit than the buyer.

Complementor

Unlike a competitor, if another firm's being in existance causes buyers to value your product more if they are in existance

Fragmented Industries

Industries in which a large number of small or medium sized firms operate and no small set of firms has dominant market share or creates dominant technologies

Emerging Industries

Newly created or newly recreated industries formed by technological innovations, changes in demand, the emergence of new customer needs, etc.

Difference between Internal and External Analysis

External: Firms identify what they should or might choose to do

Internal: Unique resources, capabilities, and competencies (required for sustainable competitive advantage) Identify what they can do.

What does internal analysis tell us?

• What are the firm's strengths and weaknesses?
• How do these strengths and weaknesses compare to competitors
• Are the resources and capabilities likely sources of competitive advantage?
• What strategies can we establish that will exploit any sources of competitive advantage?

Internal Resources

• Inputs into a firm's production process; includes capital equipment, high-quality managers, financial condition, etc.
• Basis for competitive advantage when resources are valuable, rare, costly to imitate and nonsubstitutable

Internal Capability

Capacity for a set of resources to perform a task or activity in an integrative manner

Core competency

A firm's resources and capabilities that serve as sources of competitive advantage over its rival

Financial Resources

• Debt, equity, retained earnings, etc.
• Borrowing capacity, ability to generate internal funds, etc.

Physical Resources

• Machines, manufacturing facilities, etc.
• Sophistication of plant and equipment, access to new materials, etc.

Technological Resources

• Stock of technology such as patents and trade secrets
• Ideas, scientific capabilities, capacity to innovate, etc.

Human Resources

• Experience, knowledge, judgement, risk taking propensity, etc.

Organizational Resources

• Reputation with customers and suppliers
• Culture, trust, relationship, etc.

Resource Based Model of Above-Average Returns

Why do some firms achieve better economic performance than others?

• Each organization is a collection of unique resources and capabilities that provides the basis for its strategy and that is the primary source of its returns
• Capabilities evolve and must be managed dynamically
• differences in firms' performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry
• firms acquire different resources and develop unique capabilities

2 Critical Assumptions of Resource Based View

1. Resource Heterogeneity

2. Resource Immobility

Resource Heterogeneity

Different firms may have different resources (often due to complexity, uncertainty, bundling)

Resource Immobility

Often costly to aquire/develop certain resources (or doesn't make sense) and not easily mobile across firms

Resources and Capabilities: Core Competencies

1. Value

2. Rareness

3. Imitability

4. Organization

Question of Value

Does a firm's resources & capabilities add value by enabling it to exploit opportunities and/or neutralize them?

Question of Rareness

How many competing firms already possess these valuable resources & capabilities?

Questions of Imitability

Do firms without a resource or capability face a cost disadvantage (via duplication or substitution) compared to firms that already possess it?

Question of Organization

Is a firm organized to exploit the full competitive potential of its resources & capabilities?

VRIO Criteria & Competitive Consequences

Non-valuable resources ----> Competitive Disadvantage

Valuable Resources ----> Competitive Parity Potential

Valuable + Rare Resources -> Temp Comp Adv Potential

Valuable + Rare + Nonimitable -> Sustainable Comp Adv Potential

Valuable + Rare + Nonimitable + Organization Capability -> Sustainable Comp Advantage

Conditions that Make Imitation Difficult

1. Unique historical conditions
2. Patents (period of protection)
3. Causal Ambiguity (Links between resources and comp adv may not be understood)
4. Social Complexity (Social relationships so complex that management cannot replicate)

Challenges of Analyzing Internal Environment

• Uncertainty, complexity, intra-organizational conflict, judgement
• Strategic decisions are non-routine, have ethical implications, and influence the organization's above average returns

Core Rigidities

Flip side of core competencies, and caused by overreliance on any advantage(s) for too long. While a successful firm's management relaxes its improvement efforts, others keep on getting better and obsolete its competitive advantage.