GM 105 Exam 1

Entails the analysis of internal and external environments of firms to maximize the utilization of recourses in relation to objectives (Bracker 1980)

formulation, implementation, and evaluation of managerial actions that enhance the value of a business enterprise

the process through which strategies are chosen and implemented (barney 1997)

The strategic management field can be conceptualized as one centered on problems relating to the creation and sustainability of competitive advantage, or the pursuit of rents (Bowman, Singh, and Thomas) 2001

Deals with the major intended and emergent initiatives. Taken by general managers on behalf of owners. Involving utilization of some resources. To enhance performance of firms in their external environments.

the link between the firm and its environment. the processes by which the organization, in a dynamic and above all interactive manager, seek to ensure that it responds to its general environment to sustain competitive advantage.

• 1. industry environment
• 2. Macro-environment
• 3. Stakeholders

*All link it by strategy

Demographic, sociocultural, legal/Political, technological, economic, global

The immediate context in which the firm operates

consisting of forces such as politics and law, technology, demography, society, the economic climate, and the state of the physical environment

Groups that affect and are affected by the firm's activities.

• 1. need to distinguish the "vital" from the "merely important"
• 2. Classification schemes like PEST can help

• Political - Changes in: government economic policy, legal requirements, government ownership
• Social - Changes in: Demographics, attitudes, and social structure
• Economic - Changes in: level of economic activity, wage rates and income distribution, exchange rates
• Technological - Development in new products, automation, information, communication, natural sciences.

suppliers, competitors and customers

Environmental scanning, environmental monitoring, competitive intelligence -- which all lead into forecasts

• Surveillance of a firm's external environment:predict environmental changes to come, detect changes already under way, proactive mode.
• *alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them.

Track evolution of environmental trends, sequence of events or streams of activities.

• Define and understand a firm's industry.
• identify rivals' strengths and weaknesses. (intelligence gathering (data) and interpretation of intelligence date. Helps a firm avoid surprises.

Plausible projections about direction, scope, speed and intensity of environmental change

Involves experts' detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment.

• Firm's strategy must:
• Build on its strengths
• Remedy the weaknesses or work around them
• Take advantage of the opportunities presented by the environment
• Protect the firm from threats.

• Is the game good (industry attractiveness)
• What is the company's position in the game?
• Michael Porter

• It is all down to luck?
• Some industries are in decline, other are growing fast?
• The basic premise that underlies analysis is that the level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry's underlying economic characteristics or industry structure.

• 1. The potential for entry into the industry by new firms.
• 2. The strength of the competition
• 3. The power of buyers
• 4. The power of suppliers
• 5. The strength of substitutes for the industry's products.
• 6. The strength of complements of the industry's products.

• Affecting industry attractiveness
• Sides: Potential entrants, buyers, substitutes, and suppliers

Middle: (industry competitors (rivalry among existing firms)

• Profits of established firms in the industry may be eroded by new competitors
• Sources of entry barriers: Economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale.

• Buyers threaten an industry by:
• Forcing down prices, bargaining for higher quality or more services, and planning competitors against each other.
• **Powerful when: concentrated purchases, standard and undifferentiated product, few switching costs, earns low profit, backward integration, unimportant to the quality of the product

Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services.

Supplier group powerful when: dominated by only a few companies, not obligated to deal with substitute products, important input to a buyers business, groups products are differentiated and built up switching costs, poses a credible threat of forward integration

• Substitutes limit the potential returns of an industry.
• Ceiling on the prices that firms in the industry can profitably charge.
• Price/Performance ration

• Price competition
• advertising battles
• product introductions
• increased customer service or warranties

Factors that lead intense rivalries: Numerous or equally balanced competitors, slow industry growth, high fixed or shortage costs, lack of differentiation or switching costs, capacity augmented in large increments, high exit barriers.

Profit = price - cost

• Supplier Power: suppliers price sensitivity, relative bargaining power
• Substitute competition: buyers propensity to substitute, relative prices and performance of subs.
• Buyer power: buyers price sensitivity, relative bargaining power
• Threat of Entry: capital requirements, economies of scale, absolute cost advantage, product differentiation, access to distribution channels, legal/regulatory barriers, retaliation
• Industry Rivalry: Concentration, diversity of competitors, product differentiation, excess capacity and exit barriers, cost conditions.

• Industry analysis can be used to:
• 1. explain difference in profitability between industries and changes in the profitability of a given industry over time.
• 2. Assist managers in positioning the firm advantageously.
• 3. Predict possible changes in competition and profitability in the near future
• 4. identify opportunities for changing industry structures and alleviating competitive pressures.

• 1. industry analysis provides critical information and should always be carried out before a company makes a move.
• 2. the strategist must examine the structure of an industry and understand the five forces
• 3. each industry is likely to be somewhat different. In each industry, some the five forces are likely to more significant than others.
• 4. For the strategist, it is important to figure out which are the most important forces and what can be done about them.
• 5. they should give greatest attention to the forces that can be most readily influenced in a way that improves a company's performance.

• 1. defining the industry
• 2. choosing the appropriate level of analysis
• 3. dealing with missing factors
• 4. dealing with uncertainty and rapid structural change

• 1. it omits important variables and cannot be applied to the dynamic and complex realities of many industries without significant modification
• 2. The premise on which the model is based is flawed and not supported by strong empirical evidence.

• A number of studies seem to show that industry environment is a relatively minor determinant of a firm's profitability
• This points to the need for more analysis in competition and between firms. - competitive behavior and individual firms.

• Alternative to five forces.
• Sides: customers, complementors, suppliers, competitors
• Middle: company

• Complementary products:
• Are products, not in the same industry, whose patterns of demand are systematically positively correlated and move in tandem
• Created a reciprocal expansion of demand
• Ex: skis and ski boots, sails and sailboats, tires and autos.

• Are a level of analysis between the firm and the industry
• Characteristics:
• 1. firms within an industry that have similar costs and value drivers compared to firms in other groups.
• 2. Firms which compete in the same segment or across segments for the same customers.
• 3. Firms that take a similar approach to competing in an industry.

• 1. are actions taken by stronger and more profitable competitors to protect their segments from entry by rival firms in the industry.
• 2. Prevent the movement of firms from one strategic group to another.
• 3. Are created by entry-deterring behavior of firms in a group
• 4. Are similar to barriers to entry to the industry

When a firm successfully formulates and implements a value creating strategy

An integrated and coordinated set for commitments and actions designed to exploit core competencies and gain a competitive advantage.

When a firm implements a strategy that its competitors are unable to duplicate or find too costly to try to imitate.

The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above average returns.

• 1. Effective implementation of:
•   Simple, consistent, long-term goals
•   Profound understanding of the competitive environment
•   Objective appraisal of resources

Decisions are determined only by analysis

Decisions are determined by both analysis and unforeseen environmental developments, unanticipated respires constraints, and/or changes in managerial preferences. (a intended strategy may become an unrealized strategy. An emergent strategy will become a realized strategy

• Competing in the present
• Where are we competing?
•  Product market scope.
•  geographical scope
•  Vertical Scope

• How are we competing?
•  What is the basis of our competitive advantage?

• Preparing for the future
• What do we want to become
•  vision statement
• What do we want to achieve?
•  Mission statement
•  Performance goals
• How will we get there?
•  Guidelines for development
•  priorities for capita; expenditure, R&D
•  Growth modes: organic growth, M&A, alliances

• Allows for planned actions rather than reactions
• Helps coordinate business unit strategies

• A condition of rapidly escalating competition based on:
•  Price-quality positioning
•  Competition to create new know-how and establish first-mover advantage
•  competition to protect or invade established product or geographic markets

• Goods, people, skills, and ideas move freely across geopgraphic borders.
•  Movement is relatively unfettered by artificial constraints
•  Expansion into global arena complicates a firm's competitive environment
•    Short-term: Where is the fastest growth likely to occur?
•    Long-term: where will sustainable growth occur?
• Increased range of oppurtunities for companies competing in the 21st-century competitive landscape
•    Liability of foreignness-the risks of participating outside of a firm's domestic country in the global economy
•    The amount of time required for firms to learn how to compete in markets that are new to them.

• Dominance of the external environment
•   The industry in which a firm competes has a stronger influence on the firm's performance than do the choices managers make inside their organizations.
• Industry Properties determining performance
•    Economies of scale
•    Barriers to market entry
•    Diversification
•    Product differentiation
•    Degree of concentration of firms in the industry
• Model
• 1. The external environment
• 2. An attractive industry
• 3. Strategy formulation
• 4. Assets and skills
• 5. Strategy implementation
• Equals = Superior returns

• 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 that structural characteristics of the industry
•  Firms acquire different resources and develop unique capabilities.
• Model:
•  Resources
•  Capability
•  Competitive Advantage
•  An attractive industry
•  Strategy formulation and implementation
•  Results" Superior returns

• I/O: focuses on the environment outside the firm
• Resource-based: focuses on the inside
• *successful strategy formulation and implementation actions result only when the firm properly uses both models

• Corporate strategy: rate of return above the cost of capital (how do we make money?) - industry attractiveness (which industries should be in?)
• Business strategy: rate of return above the cost of capital (how do we make money?) - competitive advantage (how should we compete?)

• Vision: a enduring picture of what the firm wants to be and, in brad terms, what it wants to ultimately achieve
•   Stretches and challenges people and evokes emotions and dreams
• Effective vision statements are:
•   Developed by a host of people from across the organization
•   Clearly tied to external and internal environmental conditions
•   Consistent with strategic leaders' decisions and actions.
• Mission:
•   specifies the business or businesses in which the firm intends to compete and the customers it intends to serve
•   is more concrete that the firm's vision
•   is more effective when it fosters strong ethical standards.
• Above average returns are the fruits of the firm's efforts to achieve its vision and mission.

• Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm's performance.
•  The more critical and valued a stakeholder's participation, the greater a firm's dependency on it.
•   Managers must find ways to either accommodate or insulate the organization from the demands of stakeholders controlling critical resources
• Stakeholder Involvement:
•  How to divide returns to keep stakeholders involved?
•  How to increase returns so everyone has more to share?

• Capital market stakeholders: shareholders; major suppliers of capital (banks)
• Product Market stakeholders: primary customers, suppliers, host communities, unions
• Organizational Stakeholders: Employees, managers, nonmanagers.

• Companies accept responsibility beyond the immediate interest of shareholders for:
•  ethical reasons
•  reasons of self interest
•    Sustainability
•    Reputation
•    Licenses to operate

• 1. Macro-economic factors (business cycle, interest rates, exchange rates)
• 2. Industry factors (external) buyers, suppliers, competition, substitutes
• 3. Strategy factors (internal) sustained differences in market position within an industry 

opportunities and threats. Firms identify what they might choose to do.

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

• 1. resource: a relatively stable, observable, tradable asset owned by the firm and one that contributes to the firm's performance (patent, brand, geographical location (retailing)
• 2. Capability: is the ability of the firm to use its organization and people to accomplish tasks at a high level of expertise continuously over time (customer service or pricing) *can not be traded

• observable
• tradable
• contribute to firms market position
• have value if difficult to imitate or sub
• Ex: patents, natural resources, brand, distribution network

• cannot be readily observed
• not tradable
• can contribute to higher value, lower cost
• less stable than resource
• can be developed independently of resource
• derive their strategic value from their use in support to the firms resources

perspective that firms' competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute.

• HR (knowledge, trust, managerial capabilities)
• Innovation: ideas, scientific capabilities
• Reputational: brand name, with customers, with suppliers

the competencies and skills that a firm employs to transform inputs into outputs. (corporate management, MIS, R&D, Manufacturing, Design, Marketing, Sales, Distribution & Service)

• Valuable capabilities: helps a firm neutralize threats or exploits oppurtunity
• Rare Capabilities: are not possessed by many others
• Costly-to-imitate Capability: historical, ambiguous cause, social complexity
• Nonsubstitutable Capabilities: no strategic equivalent

• When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.
• Resources and capabilities are the primary sources of profitability.

• Allows the firm to understand the parts of its operations that create value and those that do not.
• A template that firms use to: understand their cost position; identify multiple means that might be used to facilitate implementation of a chosen business level strategy.
• Primary activities involved with: a products physical creation, sale and distribution to buyers, and service after the sale
• Support activities: provide the assistance necessary for the primary activities to take place.
• Value chain: shows how a product moves from the raw-material stage to the final customer
• To be a source of competitive advantage, a resource or capability must allow the firm: to perform an activity in a manner that is superior to the way competitors perform it, or to perform a value-creating activity that competitors cannot complete.

Service, marketing and sales, outbound logistics, operations, inbound logistics

Partnering with vendors- purchasing goods - managing and distributing inventory - operating store - marketing and selling

Firm infrastructure, HR management, Technological development, procurement

R&D - engineering - design and solutions - marketing and sales - service

• Inbound logistics: receive, store and inputs to products
• Operations: convert inputs into final products
• Outbound logistics: collecting, storing and distributing to customers
• Marketing and Sales: induce customer to buy
• Service: enhance or maintain a products value
• **each activity should be examined relative to competitor's abilities and rated as superior or inferior

• Procurement: purchase the inputs needed to produce a firms' products
• Technological Development: improve product and manufacture it
• HR management: recruiting, hiring, training, developing, and compensating
• Firm Infrastructure: support the work of the entire value change (GM, planning, finance, accounting, legal, government relations) identifies external oppurtunities and threats, resources and capabilities, supports core competencies
• *** each activity should be examined relative to competitors abilities and rated as superior or inferior

• Step 1: identify the key resources and capabilities
• Step 2: Appraising resources and capabilities (assessing importance, and relative strength)
• Step 3: developing strategy implications (exploiting key strengths, managing key weaknesses, superfluous strengths)

• Path dependency and role of early experience
• Linkages between resources and capabilities
• Are organizational capabilities rigid or dynamic?

• Acquiring capabilities: mergers, acquisitions and alliances
• Internal development: focus and sequencing

• 1. CAPABILITIES AND RESOURCES Identify the firm's resources and capabilities
• 2.CAPABILITIES AND RESOURCES Explore the linkages between resources and capabilities
• 3. POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE Appraise the firm's resources and capabilities in terms of: a) strategic importance, b) relative strength
• 4. STRATEGY Develop strategy implications: a) in relation to strengths (how can these be exploited more effectively and fully? b) in relation to weaknesses: identify oppurtunities to outsource activites, and how they can be corrected through acquiring and developing resource and capabilities

• The purchase of a value creating activity from an external supplier (few orgs possess the resources and capabilities required to achieve competitive superiority in all primary and support activities)
• By performing fewer capabilities: a firm can concentrate on those areas in which it can create value; specialty suppliers can perform outsourced capabilities more efficienty

A firm may outsource all or part of one or more primary and/or support acitivites

• Improving business focus
• Providing access to world class capabilities
• Accelerating re-engineering benefits
• Sharing risks
• Freeing resources for other purposes

• Seeking greatest value
• Evaluating resources and capabilities (do not outsource activities in which the firm itself can create and capture value)
• Environmental threats and ongoing tasks (do not outsource primary and support activities used to neutralize environmental threats)
• Nonstrategic team resources (do not outsource capabilities critical to the firms success
• Firm's Knowledge base: do not outsource activities that stimulate the development of new capabilities and competencies.

• Never take for granted that core competencies will continue to provide a source of competitive advantage.
• All core competencies have the potential to become core rigidities - former core competencies that now generate inertia and stifle innovation.
• Determining what the firm can do through continuous and effective analyses of its internal environment will increase the likelihood of LT competitive success.