UCF Capstone Mid-Term Flashcards

Terms Definitions
3 Overarching Themes of Strategic Management
Firms and industries are dynamic in nature
To succeed, the formulation of a good strategy and its implementation should be extricably connected
Strategic leadership is essential if a firm is able to both formulate and implement strategies that create value

Need firm's ongoing competitive position
Under Armour and its competitors Nike and Addidas
Started line of athletic clothing with moisture-wicking microfiber
Advertising campaign: "Click-Clack: I think you hear us coming!"
Now dominates the sports apparel market 
Strategic Leadership
Responsible for strategy formulation
Players with key roles in strategy implementation by making substantive resource allocation decisions and developing key-stakeholder support for the strategy
Keep in mind: a significant part of the organization's overall strategy often emerges from the decisions and actions of lower level managers
Strategic Management
Process by which an organization manages the formulation and implementation of its overall strategy
Formulation: figuring out the overall strategy, what to do?
Implementation: getting everyone in the organization to do the things that support the overall strategy
Comes from the Greek word Strategos, "the (military) general's view" where the general creates the holistic "big picture" and the lower level officers create the tactical details
The overarching, coordinated means by which an organization seeks to achieve its goals and objectives
Encompasses the pattern of actions that have been taken (planned and unplanned) and actions that are planned to be taken by an organization in pursuing its objectives
More than just planned actions
The firm attempting to gain an advantage over other potential providers of similar products and services
Helps a firm accomplish its objectives in the fact of competition 
Benefits of Understanding Strategic Management
Help better understand the firm's  overall mission, goals and objectives
Help better understand the challenges in a company's competitive environment (i.e. opportunities and threats)
Help better understand the kinds of internal resources and capabilities that are critical to a firm's success (i.e. internal strengths and weaknesses)
Can make you a more valuable employee
Strategic Management Process
Strategy Formulation
Vision and Mission: fundamental organizational purpose, organizational values
Goals and Objectives: specific targets, measurable outcomes
Strategy: The central integrated means by which a firm seeks to achieve its objectives through internal and external strategic analyses of Arenas, Vehicles, Differentiators, Staging, and Economic Logic
Strategy Impementation
Corporate-Level and Business-Level Strategy
In which markets do we compete today?
In which markets do we want to compete tomorrow?
How can we, as a corporate parent, add value to our various lines of business

How do we compete in this market today?
How will we compete in this market in the future?
Strategy Formulation and Implementation
Formulation: Process of deciding what to do
Implementation: process of performing all the activities necessary to do what has been planned
Example of Process:
Compete as discount retailer in rural markets (Form)
Invest heavily in organizational structure, systems and processes (Implement)
Leverage inventory and sourcing systems to be low-cost leader (Form)
Intended and Realized Strategy
Intended or Planned Strategy: comes from rational and methodical planning (Deliberate strategy)
Unrealized Strategy: unplanned pattern of decisions and/actions (Emergent strategy)
Realized or Actual Strategy: combination of both
Strategy of For-Profit Business Firms
Basic goal: earning profits that depend on value created for customers by firms' products/services which drives customer willingness-to-pay, and the costs associated with delivering firms' products/services
Integrated set of choices (the means) through which it seeks to achieve this goal
Business Strategy Diamond: Arenas
Where will we be active and with how much emphasis?
Which product categories?
Which channels?
Which market segments?
Which geographic areas?
Which core technologies?
Which value-creation strategies?
Business Strategy Diamond: Vehicles
How will we get there?
Internal development?
Joint Ventures?
Business Strategy Diamond: Differentiators
How will we win, in what ways are what we offer "better" than what others offer?

Product reliability?
Speed to market?
Business Strategy Diamond: Staging
What will be our speed and sequence of moves?

Speed of expansion?
Sequence of initiatives?
Business Strategy Diamond: Economic Logic
How will returns be obtained?

Lowest cost through scale advantages?
Lowest cost through scope and replication advantages?
Premium prices due to unmatchable service?
Premium prices due to proprietary product features?

Strategy Diamond Example: Jet Blue
Objective: to "bring humanity back to air travel"
Arenas: low fare commercial air carrier in under-served but over-priced US cities
Vehicles: start from scratch and achieve all growth internally (i.e. do not purchase a regional airline)
Differentiators: high level of service compared to low fare competitors (e.g. leather eating, satellite TV), lower fares
Staging: grow from one rout between two cities to serving 20 cities in just 3 years
Economic Logic: secure cost advantage by being willing and able to perform key tasks differently (i.e. one type of plan, JFK home base, secondary location)
Strategy Implementation
Process of executing the firm's strategy
Taking actions that put the strategy into effect
Ensuring that ongoing decisions (big and small) are consistent with the strategy
Goals of Strategy Implementation
To translate good ideas into actions that can be executed (and sometimes use execution to generation or identify good ideas)
To make sure strategy formulation is comprehensive and well informed
Key Levers of Strategy Implementation
Organization Structure: tall versus flat, centralized versus decentralized
Organizational Systems and Processes: control and incentive systems, information systems, budgeting systems
Organizational People and Rewards: selection processes, training and development
Determinants of Firm Profitability: External Perspective
"Positional View"
Contends that variations in a firm's competitive advantage and performance are primarily a function of industry attractiveness
Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive
Determinants of Firm Profitability: Internal Perspective
"Resource-Based View"
Contends that firms are heterogeneous bundles of resources and capabilities 
Firms with superior resources and capabilities enjoy competitive advantage over other firms. This advantage makes it relatively easier to achieve consistently higher levels of performance
Determinants of Firm Profitability: Dynamic Perspective
Suggests that in dynamic, rapidly changing markets, both internal and external sources of high rates of profit are often not long lasting
Competitive Advantage
Firms tend to focus on beating their rivals
Exists to the extend that a firm has a certain something that gives it the potential to earn higher profits than competitors
Sustained Competitive Advantage "the holy grail": exists to the extent that firm can earn higher profits than competitors over a long period of time
Xerox's Turnaround 
1959: Introduces the Xerox 914 copier which transformed the workplace
Chartered member of the "nifty 50", 50 stocks most favored by institutional investors
Since 1970s, crippled by competition 
2001, Mulcahy takes over and Xerox reports first quarterly loss in 16 years
Mulcahy lacks product development and financial experience but gets the job because the board has confidence in her "strategic mind"
She refines Xerox mission and reminds people of core values in mission statement
Aligns operation with the refined mission and values
Sells Exerox's China and Hong Kong operations and half of a stake in a joint venture with Fuji, closes down inkjet printer business
Xerox reaches profitability through cutting expenses, selling non-core assets, reducing long-term debt 
In 2002, generates 1.9 billion in operating cash flow, 91 million in net income on 15.8 billion in sales
Mission Statement
"Our strategic intent is to help people find better ways to do great work-by constantly leading in document technologies, products and services that improve our customers' work processes and business results"

Core Values
We succeed through satisfied customers.
We deliver quality and excellence in all we do.
We require premium return on assets.
We use technology to develop market leadership.
We value our employees.
We behave responsibly as a corporate citizen.

Leadership versus Strategic Leadership

Leadership: the task of exerting influence on other people's pursuit of goals in an organizational context
Strategic Leadership: managing an overall enterprise and influencing key organizational outcomes, such as company wide performance, competitive superiority, innovation, strategic change and survival

Executive Roles: Interpersonal
Figurehead: performs ceremonial activities that have symbolic benefits (breaking ground at new facility)
Leader: provides direction and motivation to organizational members
Liaison: maintains relationships with key external stakeholders (customers, suppliers)
Executive Roles: Informational
Monitor: collects/filters information about the firm and its competitive environment (largely through social contracts/networks, written reports)
Disseminator: communicates understandings to internal constituents (employees), value-based as well as factual information
Spokesperson: communicates understandings to external stakeholders
Executive Roles: Decision
Most important role of top leaders
Entrepreneur: designs overall firm strategy, focus on voluntary, proactive initiatives (the intended strategy)
Disturbance handler: handles unanticipated strategic issues, threats to well-being of firm but also opportunities
Resource allocator: key to success executing strategy, manages trade-offs inherent in allocating resources to alternative activities, resources committed to one initiative are not available for other initiatives
Negotiator: executes non-routine transactions involving other organizations (acquisitions of other companies)
Hierarchy of Leader Capabilities
Level 5 Leaders (Executive Leaders): Build greatness through combination of will and humility
Level 4 Leaders (Effective Leaders): Present clear and compelling vision and lead a group to superior levels of performance
Level 3 Leaders (Competent Manager): Organize people resources to accomplish predetermined objectives
Level 2 Leaders (Contributing Team Member): Work effectively with others as a member of a team to achieve group objectives
Level 1 Leaders (Highly Capable Individual): Make individual contributions through talent and work ethic
Level 5 Leaders, Executive Leaders
Professional Will and Professional Modesty
Professional Will
The ability to translate strategic intent into the resolve needed to pursue a strategy
Willing/able to make hard choices over a period of time
Professional Modesty

Prefers to share credit rather than hog it
Tends to shun public attention
Acts with calm determination
Exercises personal ambitions on the company's behalf rather than one's own

Characteristics of a CEO
Little consensus on whether personality or background matters more
Personality: high tolerance for risk/ambiguity, novelty, complexity, charismatic
Background/Demographic: White males, 45-60, Ivy League education, more diversity in smaller/privately-held companies
Competencies: talent for strategy thinking, decision-making toughness (willingness/ability to change organization's strategy, even when change means departure from traditional way of doing business)
What Makes an Effective Executive Team?
Effectively responds to a complex and changing environment
Can manage the needs of interdependent but often diverse units, arenas or functional areas
Valuable and effective social network with each team member possessing an extensive network outside the team
Able to develop a coherent plan for executive succession
Vision and Mission
Simple statement of where the firm is going, and what the firm's leaders want it to be in the future
Forward-looking: Identifies the firm's desired, long-term status and what the firm's leaders want the firm to look like many years from now
Emphasis on ambition (force the firm to stretch) and ambiguity (allows flexibility for changing strategy or implementation tactics)

Declaration of what the firm stands for
Idealized version of firm's current state
Fundamental purpose and values that are prized by stakeholders
Emphasis on purpose and core values
*Ultimate goal of a firm strategy is the realization of firm mission and vision*

Goals and Objectives
Goals: broad indication of organizational intentions 
Objectives: specific measurable steps
Provide a bridge between the vision and the strategy
An effective vision and mission is anchored by goal and objectives
Strategic Coherence
Exists to the extent that the key elements of a firm's strategy are consistent and "fit" together
Most effective strategies are coherent
Promoted through well-understood vision and mission
Symmetrical co-alignment of the 5 elements of a firm's strategy
Congruence of policies in functions (finance, production, marketing) with the firm's 5 elements of strategy
Overarching fit of various businesses under the corporate umbrella
Individuals or groups who have an interest in an organization's ability to deliver intended results and maintain the viability of its products and services 
Steps in Identifying Key Stakeholders
Stakeholder Analysis
Who will be impacted by a strategy/strategic initiative or play a role in its implementation?
Which stakeholders will be most impacted by strategy/strategic initiative?
Which stakeholders can exert the greatest influence on strategy/strategic initiative?
After identifying stakeholders ask..
Have I identified any vulnerable points in either the strategy or its potential implementation?
Which groups are mobilized and active in promoting their interests?
Have I identified supporters and opponents of the strategy?
Which groups will benefit from successful execution of the strategy and which may be adversely affected?
Where are various groups located? Who belong to them, and who represents them?
Benefits of using Stakeholder Analysis
Can use the opinions of the most powerful stakeholders to shape your strategy and tactics at an early stage
Gain support from powerful stakeholders to help win more resources
Can ensure that stakeholders fully understand what you are doing and understand the benefits of your project
Can anticipate what people's reactions to your project may be and build actions into the plan that will win people's support
Strategy: Ethics and Biases
After a prospective strategy/strategic initiative has been formulated..

Is it ethical?
Have any systematic biases clouded our decision making?
Optimism and the planning fallacy
Confidence, over-confidence and hubris
Illusion of control
Self-serving accounts of performance troubles
Escalation of commitment
SWOT Analysis
An analysis of the internal and external environment
Internal: Strength, Weaknesses, Capabilities, Relationships
External: Opportunities, Threats
Blurring of Industry Boundaries
Example: Bright House! (Combination of Cable, Internet, Long Distance Telephone)
With fewer companies providing these services, the power of buyers will be impacted
As services are bundled, the cost to switch to another service provider will be greate
External Environment of the Organization
Strategic Group (groupings of firms that seem to be more similar in certain ways than other members of the larger industry)
Industry Environment
Macro Environment (Political, Economic, Sociocultural, Technological, Environmental, Legal)
Pressures Favoring Industry Globalization 
Markets: homogeneous customer needs, global customer needs, global channels, transferable marketing approaches

Costs: large scale and scope economies, learning and experience, sourcing efficiencies, favorable logistics, arbitrage opportunities, high R&D costs

Governments: favorable trade policies, common technological standards, common manufacturing and marketing regulations

Competition: interdependent countries, global competitors
Key Success Factor (KSF)
Key asset or requisite skill that all firms in an industry must possess in order to be a viable competitor 
Soft Drink Example (Barriers to Entry): ability to meet competitive pricing, extensive distribution, ability to raise consumer awareness, broad product mix, global presence, well positioned bottlers and bottling capacity
Industry Concentration and Fragmentation 
Key Determinant of Rivalry
Highest Concentration: Monopoly
Very Concentrated: Duopoly
Less Concentrated: Oligopoly 
PESTLE Analysis
Simple but useful tool for analyzing the wider, macro environment that a company operates in
Political, Economic, Social, Technological, Legal, Environmental
Directs our attention to each of these key elements of the macro environment 
Particularly beneficial in decisions about entering new geographic markets
PESTLE Analysis: Political
How stable is the political environment?
Local taxation policies?
Government involved in trading agreements? (EU, NAFTA)
Foreign-trade regulations?
Social-welfare policies?
PESTLE Analysis: Economic
What are the relevant macro-economic conditions and trends?
Interest rates? Level of inflation? 
Local employment levels per capita? GDP per capita?
Exchange rates between critical markets and how will they affect your production and distribution of your goods?
PESTLE Analysis: Socio-cultural
What are the prevailing norms, values, and attitudes that are relevant to your industry and company and how are they evolving?
Especially important when considering new geographic markets
What are the current demographics and how are they changing? 
Level and distribution of education and income? 
Dominant local religions and influence on consumer attitudes 
What is the level of consumerism and what are popular attitudes toward it? 
What pending legislation affects corporate social policies (domestic-partner benefits, maternity/paternity leave)?
What are the attitudes toward work and leisure?
PESTLE analysis: Technological
What are the technological trends in the wider environment that are relevant to your industry and company?
What is the level of research funding in government and industry and are those levels changing?
What is the status of intellectual-property issues in the local environment?
Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?
PESTLE Analysis: Legal
What are the critical laws and regulations that are relevant to your industry and company?
Closely linked to political conditions
What are the regulations regarding monopolies and private property?
Does intellectual property have legal protections?
Are there relevant consumer laws?
What is the status of employment, health-and-safety, and product-safety laws?
PESTLE Analysis: Environmental
What are pending environmental issues that are relevant to your industry and company?
What are prevailing environmental laws and regulations?
How might your company be impacted by actions of environmental groups?
Porter's Five Forces Model
Helps figure out the underlying reasons for differences in profitability of firms in different industries
Forces: Threat of New Entrants (and Entry Barriers), Buyer Power, Supplier Power, Threat of Substitutes, Degree of Rivalry
Also: Complementors
Five Forces: Firms in a particular industry will earn low profits to the extend that..
Rivalry/Competition is intense: price competition (airlines)
Barriers to Entry are low
Threat of Substitutes is high
Buyers of industry firms' products/services are powerful
Suppliers of the stuff that goes into industry firms' products/service are powerful
Five Forces: Rivalry
Increased rivalry = lower industry profitability
Examples: PC, soft drink industry
Tends to be more intense when..

Many competitors
Low industry concentration and competitors are about equal size
Slow market growth
Low product differentiation
Low brand image/equity
Low switching costs
High fixed costs
High exit barriers

Five Forces: Threat of New Entry
Easier for new firms to enter industry = lower industry profitability
Examples: PC, restaurant, soft drink industry
Entry tends to be easier when..

Low capital requirements
Low product differentiation
Customers are not concerned with brand
Low switching costs
Easy access to distribution channels
Incumbent firms do not have significant cost advantages (Economies of scale, economies of learn, control of low cost supplies)

Five Forces: Power of Suppliers
Negotiations over what price is paid for supplies
Suppliers powerful = lower industry profitability
Example: DeBeers in the Diamond industry
Tend to be more powerful when..

Few suppliers who control most of the supply
What's beings supplied is critical to industry firms
High costs to switch between suppliers
Backward integration difficult

Five Forces: Power of Buyers
In terms of what price industry firms can charge for their product
Two kinds of buyers: channels of distribution, end consumers
Buyers powerful = lower industry profitability
Tend to be powerful when..

Few buyers and many industry firms
What industry firms provide is not critical to buyers
Easy for buyers to switch between industry firms
Buyers can readily backward integrate
Buyers know a lot about the product

Five Forces: Threat of Substitutes
Substitutes readily available = lower industry profitability
Example: MP3 Player and satellite radio, soft drinks and bottled water, movie rentals and cable tv
Other products that provide the same kinds of benefits that the industry firms' product provides for about the same price and customers tend to substitute one for the other
6th Force: Complements
Product or service that is used together with industry firms' product that increases the value created by industry firms' product
Any factor that makes it more attractive for suppliers to supply an industry on favorable terms or makes it more attractive for buyers to purchase products or service from an industry at prices higher than it would pay absent the complementor
Lots of great complements = higher industry profitability
Example: computer software and PCs, online music and MP3 players, milk and cookies, Delta plane orders and American Airlines plane orders (lower costs from Boeing)
Availability of complements increases the price that buyers are willing to pay for industry firms' product
Industry Life Cycle
Embryonic: niche market (selected products for selected markets), participants emphasize problem solving (product as "solution"), technological uncertainty
Growing: market expands beyond niche, more competitors enter, customers become better informed
Mature: proliferation of products and markets served, market volatility and beginnings of industry consolidation, aggressive customers
In Decline: product/market contraction, further consolidation and industry regeneration
Technological Discontinuities 
Occurs when a breakthrough technology is developed
Product Innovation: development of a new breakthrough product (E.g. development of the PC, in disk-drive industry every new generation of technology led to the demise of the market leader)
Process Innovation: new way of manufacturing a product/doing business (Dell's direct model of selling PCs, Southwest airlines business model changed by adopting new processes or point-to-point model)
Competency-Enhancing Innovation: builds on key competencies of existing firms, typically developed by existing firms (microprocessor development)
Competency-Destroying Innovation: challenges key competencies of existing firms, typically developed by outside firms (electronic calculator vs. slide rule)
Scenario Planning
An understanding of the big picture and a plan to manage uncertainty
Define target issue, time frame, and scope for scenarios
Brainstorm key drivers, decision factors, and possible scenario departure or divergence points
Develop the framework by defining two specific axes
Flesh out the picture
Specify indicators that can signal which scenario is unfolding
Assess the strategic implications of each scenario
Sources of Firm Success
Much variation in profitability within particular industries
Both industry and specific attributes of firm are important determinants of firm success
Research suggests that specific attributes of firm are most important
Many instances of firms that succeed in unattractive industries
Resources and Capabilities: Fundamental building blocks of strategy
Inputs that firms use to create goods and services
Undifferentiated: land, unskilled labor, debt financing, commodity-like materials
Tangible: rural real-estate or high traffic real-estate 
Intangible: more likely to contribute to competitive advantage, knowledge, organizational culture, location selection, patents, trademarks, reputation, brand 
Easy to acquire 
Difficult to acquire: good managerial judgment, intellectual property, trade secrets, brand equity
Capabilities (Competence)
Firm's skill in using its resources to create goods and services
Combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services (product design, manufacturing, marketing)
Core competences: capabilities that are central to the main business operations of the firm 
Distinctive competences: capabilities that set a firm apart from other firms (other firms aren't as good at a particular activity
Examples: Wal-Mart (logistics), Vanguard (low cost structure), 3M (innovation)
Help us figure out whether a particular resource or capability promotes competitive advantage and the extent to which advantage is likely to be sustainable
Value, Rarity, Inimitability, Nonsubstitutability, Exploitability  
VRINE Model: Value and Rarity

Valuable: Enables a firm to take advantage of opportunities or to fend off threats in its environment
Rarity: Scarcity relative to demand, does not mean your firm is the only one that has the resource/capability
Valuable resources/capabilities that are rare have potential to confer competitive advantage
Valuable and rare resources can help the firm have lower costs than competitors, "Better" product than competitors that customers are willing to pay a higher price for

VRINE Model: Initimitability and Nonsubstitutability 
Value and rarity are not sufficient to support sustained competitive advantage, must have..
Initimitability: hard and/or costly for competitors to imitate resource/capability
Nonsubstitutability: hard and/or costly for competitors to acquire/develop a substitute for the resource/capability (E.g. Amazon developed on-line substitute for retail stores)
Barriers to imitation and substitution

Formal property rights: patents, copy rights
Prohibitive costs: costs associated with developing brand equity, acquisition
Time: some capabilities are developed over a long period of time
Casual ambiguity: hard for other companies to figure out exactly why the market leader is so successful (E.g. Apple, Google, 3-M, Toyota, Wal-Mart)

VRINE Model: Exploitability
Firm's ability to take advantage of its resources and capabilities
Necessary for firm to benefit from resources that are valuable, rare, inimitable, and nonsubstitutable
Example: Xerox invented networking of computers, laser printer, graphical-user interface operating system, computer mouse but wasn't able to bring any of these technologies to market
Sustainable Competitive Advantage
Holy grail of firm success
Depends on: inimitability, non-substitutability, durability, knowledge (tacit or non-codifiable knowledge)
Socially-Complex Resources
Unique Culture: beliefs and values that organizational members share that guide their actions at work
Routines for Performing Complex Activities: "Standard operating procedures" for performing key activities that are developed over time, frequently not consciously designed
Trust: between organizational members and/or between the organization and external stakeholders (customers, suppliers) can help reduce costs
Valuable and rare socially-complex resources are often key sources of sustained competitive advantage because they are typically art to imitate or substitute 
Dynamic Capabilities
Exist to the extent that the firm is able to modify and revise its resources and capabilities to match a shifting environment
Emphasizes the new to renew the firm's resources and capabilities to (a) adapt to change in competitive environment or (b) create (favorable) change in the competitive environment
Especially critical in dynamic rather than static environments
The Value Chain
Firms engage in a sequence of basic activities as they work to provide products/services to customers
Each activity provide opportunities to add value for customers
Generic value chain: Primary activities, secondary (support) activities
Shorter-term advantage: find a better way to perform the same activities
Longer-lasting advantage: find a different way to perform activities (E.g. Southwest, Ikea, Dell)
The Value Chain: Primary Activities
Internet Startup Example
Inbound Logistics: inbound shipment of top titles, warehousing
Operations: server operations, billing, collections
Outbound Logistics: picking and shipment of top titles from warehouse, shipment of other titles from third-party distributors
Marketing and Sales: pricing, promotions, advertising, production information and reviews, affiliations with other websites
After-Sales Service: returned items, customer feedback
The Value Chain: Secondary (Support) Activities
Internet Startup Example
Procurement: CDs Shipping, computers telecom lines, shipping services, media
Technology Development: Inventory system, site software, pick and pack procedures, site look and feel customer research, return procedures
Human Resources: recruiting, training, incentive system, employee feedback
Firm infrastructure: financing, legal support, accounting
Analyzing Internal Source of Advantage
Draw the firm's value chain
To what extent is the firm better or worse than its competitors at each value chain activity? (Does your firm or competing firms have valuable or rare resources and capabilities?)
If the firm you are analyzing or its competitors has advantages in certain value chain activities, how sustainable are those advantages? (Does your firm or competing firms have valuable and rare resources/capabilties that are also inimitable and nonsubstitutable?)
If your firm is the leader, what can your firm do to keep others from catching up? Opposite if not the leader.

Business Strategy
Choices that a firm makes about its competitive posture within a particular line of business (industry)
Strategic Positioning
The ways that managers of a company situate (position) that company relative to it's rivals along important competitive dimensions
Main goal: to reduce the effects of rivalry (crucial force in 5 Forces Model) and improve profitability
Economic Logic: Low Cost Approach
Focus efforts on minimizing costs while providing a more or less equivalent product or service at lower cost
Benefits: Capture market share by offering lower price or earn higher margins by maintaining price parity
Example: Wal-Mart, Pacific Cycle, Gallo Wines, Southwest Airlines
Economic Logic: Differentiation Approach
Focus their efforts on offering a product or service that customers see as providing extra value 
Key is convincing customers that extra value is provided and create extra value in cost efficient ways
Extra value can flow from several sources: quality, reliability, prestige
Charge sufficiently higher prices to more than offset the added costs of differentiation 
Capture market share by offering higher "value" product at same price or earn higher margins by raising prices over competitors
Example: Mercedes-Benz, Trek Bicycles, Coke and Pepsi, Harley Davidson, Stouffers
Economic Arenas
Narrow: 1 or just a few market segments in an industry (Porsche)
Broad: Basically all market segments in an industry (Ford, GM)
Porter's Generic Strategies
Broad low-cost leadership (Wal-Mart, Gallo Wines)
Broad differentiation (Trek Bicycles, Coca-cola)
Focused cost leadership (Jet Blue)
Focused differentiation (Montague, Mercedes Benz in US)
Integrated strategic position (Toyota: started low cost, over time invested in quality control, design and marketing and now command premium price while maintaining low costs)
*Capture the most essential elements of the Strategy Diamond: Economic logic, arenas and differentiators*
Key Drivers of Cost Advantage
Economies of Scale: average total cost for a unit of production is lower at higher levels of output, costs decrease as the scale of operation increases during any given period of time
Sources of Scale Economies: spreading fixed costs over greater output, superior inventory management, purchasing power
Sources of Scale Diseconomies: bureaucracy, high labor costs, inefficient operations

Learning Curve: costs decrease with the cumulative level of production since the production of the first unit 
Economies of Scope: if a firm produces two or more products and can share resources among two or more of these and lower the costs of each product (Mity-Lite: folding tables and chairs)
Product Technology: new entrant tries to match or beat incumbents costs by introducing a production technology that is subject to different economics (Jet Blue, Nucor Steel)
Product Design: Altered to lower a firm's production costs (Canon vs. Xerox in photocopiers)
Location Advantages for Sourcing Inputs: attain lower production costs by locating their operations in cheaper labor markets (Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US)
*To successfully pursue a cost leadership strategy a firm must be able to exploit one or more of theses while having relevant resources and capabilities*
Key Drivers of Differentiation Advantage
Premium Brand Image
Unique styling
More convenient access
Unusually high-quality
*To successfully pursue a differentiation strategy a firm must be able to exploit one or more of the drivers of differentiation advantage with relevant resources and capabilities*

Benefits: ability to drive up customer's willingness to pay (recoup added costs and generate enough profits to make strategy worthwhile)
Threats of Low-Cost or Differentiation Advantage
New technology
Too low-quality
Social, political and economic risks of outsourcing

Failure to increase buyer's willingness to pay higher prices
Under estimating cost of differentiation
Over fulfillment of buyer's needs
Imitation by rivals

Strategies for Industry Life Cycle: Embryonic
Arenas: local
Vehicles: internal development, alliances to secure missing inputs or distribution access
Differentiators: target basic needs, minimal differentiation
Staging: tactics to gain early footholds
Economic Logic: prices tend to be high, costs are also high, focus is on securing additional capital to fund growth phase
Strategies for Industry Life Cycle: Growth
Arenas: Penetration into adjacent markets
Vehicles: Alliances for cooperation, acquisitions in targeted markets
Differentiators: Increased efforts toward differentiation, low cost leaders emerge through learning/experience and scale
Staging: Integrated positions require choice of focusing first on cost or differentiation
Economic Logic: Margins can improve rapidly because of experience and scale, price premiums accrue to successful differentiators
Strategies for Industry Life Cycle: Mature
Arenas: Globalization, diversification 
Vehicles: More stable positions emerge across competitors
Staging: Choosing international markets and new industry diversification, need rational sequencing
Economic Logic: Consolidation results in fewer competitors (favoring high margins) but declining growth demands cost containment and rationalization of operatoins
Strategies for Industry Life Cycle: Decline
Arenas: Some arenas may be abandoned if decline is severe, focus on segments which provide most profitability
Vehicles: Acquisitions for diversifying moves, divestitures to exit for some competitors
Economic Logic: Rationalizing cost
Testing the Quality of a Strategy
Does your strategy exploit your key resources?With your particular mix of resources, does this strategy give you an advantageous position relative to your competitors?
Can you pursue this strategy more economically than competitors?
Do you have the capital and managerial talent to do all you envision?
Are you spread too thin?

Does your strategy fit with current industry conditions?Is there healthy profit potential where you're headed?
Are you aligned with the key success factors of your industry?

Will your differentiators be sustainable?Will competitors have difficulty imitating you?
If imitation cannot be foreclosed, does your strategy include a ceaseless regimen of innovation and opportunity creation to keep distance between you and the competition?

Are the elements of your strategy consistent and aligned with your strategic position (strategic coherence)?Have you made choices of arenas, vehicles, differentiators, and staging and economic logic?
Do they all fit and mutually reinforce each other?

Can your strategy be implemented?Will your stakeholders allow you to pursue this strategy?
Do you have the proper complement of implementation levers in place?
Is the management team able and willing to lead the required changes?
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