J370

a firm's theory about how to gain competitive advantages; almost always a theory: it's a firm's best bet about how competition is going to evolve, and how that evolution can be exploited for competitive advantage

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 competitive advantages; mission --> objectives --> external/internal analysis --> strategic choice --> strategy implementation --> competitive advantage

a firm's long-term purpose; both what a firm aspires to be in the long run and what it wants to avoid in the meantime; broad statement of its purpose and values; incorporate many common elements like the business within which a firm operates and how a firm will compete in those businesses as well as core values that a firm espouses; it can either help, hurt, or have no impact on a company's performance

firms whose mission is central to all they do; long-term profitability; earned substantially higher returns than average firms

specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission; high-quality: tightly connected to elements of a firm's mission and are relatively easy to measure and track over time

a firm identifies the critical threats and opportunities in its competitive environment; also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing

helps a firm identify its organizational strengths and weaknesses; also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely; also can be used by firms to identify those areas of its organization that require improvement or change

actions firms take to gain competitive advantages in a single market or industry; most common are cost leadership and product differentiation

actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously; most common are vertical integration strategies, diversification strategies, strategic alliance strategies, merger and acquisition, and global strategies

occurs when a firm adopts organizational policies and practices that are consistent with its strategy; organizational policies and practices that are particularly important in implementing a strategy are: a firm's formal organizational structure, its formal and informal management control systems/policies, and its employee compensation policies

a firm has this when it is able to create more economic value than rival firms; the size of this is the difference between the economic value its rivals are able to create

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

firms that create the same economic value as their rivals experience this

firms that generate less economic value than their rivals

a firm's measure of its competitive advantage calculated by using information from a firm's published profit and loss and balance sheet statements; this is sometimes hard to compare companies who use different accounting principles or companies in other countries; using accounting ratios are one way to do this

compares a firm's level of return to its cost of capital instead of to the average level of return in the industry

the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm; difficult to calculate if the firm is privately held

capital from banks and bondholders

capital from individuals and institutions that purchase a firm's stock

equal to the interest that a firm must pay its debt holders (adjusted for taxes) in order to induce those debt holders to lend money to a firm

equal to the rate of return a firm must promise its equity holders in order to induce these individuals and institutions to invest in a firm; level of performance a firm must attain if it is to satisfy the economic objectives of the two critical stakeholders: debt holders and equity holders

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

the broad contextual background within which a firm operates that can have an impact on a firm's strategic choices; consists of six interrelated elements: technological change, demographic trends, cultural trends, the economic climate, legal and political conditions, and specific international events

creates both opportunity, as firms begin to explore how to use technology to create new products and services, and threats, as it forces firms to rethink their technological strategies

distribution of individuals in a society in terms on age, sex, marital status, income, ethnicity, and other personal attributes that may determine buying patters; understanding this helps to understand potential customers; ex. Baby Boomers, growing hispanic population

values, beliefs, and norms that guide behavior in a society; define what is right and wrong in a society; what is acceptable and unacceptable, what is fashionable and unfashionable

overall health of the economic systems within which a firm operates

alternating pattern of prosperity followed by recession, followed by prosperity

the laws and the legal system's impact on business, together with the general nature of the relationship between government and business

include events such as civil wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions; these all have an enormous impact on the ability of a firm's strategies to generate competitive advantage

• (used to identify industries where perfect competition is not occurring and social welfare is not being maximized)
• industry structure: number of competing firms, homogeneity of products, and cost of entry and exit
• -->
• firm conduct: strategies firms pursue to gain competitive advantage
• -->
• performance: firm level: competitive disadvantage, parity, temporary or sustained competitive advantage; society: productive and allocative efficiency, level of employment, progress

identifies the five most common threats faced by firms in their local competitive environments and the conditions under which these threats are more or less likely to present; level of threat in an industry: threat of entry, threat of rivalry, threat of buyers, threat of substitutes, and threat of suppliers

any individual, group, or organization outside a firm that seeks to reduce the level of that firm's performance; they increase a firm's costs, decrease a firm's revenues, ext.

large number of firms, homogeneous products, low-cost entry and exit; expected firm performance-->competitive parity

large number of firms, heterogeneous products, low-cost entry and exit; expected firm performance-->competitive advantage; a market structure where within the market niche defined by a firm's differentiated product, a firm possesses a monopoly

small number of firms, homogenous products, costly entry and exit; expected firm performance-->competitive advantage

one firm, costly entry; expected firm performance-->competitive advantage

• 1. economies of scale
• 2. product differentiation
• 3. cost advantages independent of scale
• 4. government regulation of entry

exist in an industry when a firm's costs fall as a function of its volume production; low-cost duplication possible

exist when a firm's costs rise as a function of its volume of production; low-cost duplication possible

incumbent firms possess brand identification and customer loyalty that potential entrants do not

when incumbent firms have secret or patented technology that reduces their costs below the costs of potential entrants, potential entrants must develop substitute technologies to compete; the cost of developing this technology can act as a barrier to entry

when incumbent firms have taken-for-granted knowledge, skills, and information that take years to develop and that is not possessed by potential entrants; the cost of developing this know-how can act as a barrier to entry; this enables the firm to interact with customers and suppliers, to be innovative and creative, to manufacture quality products, and so forth

when incumbent firms have low-cost access to critical raw materials not enjoyed by potential entrants; the cost of gaining similar access can act as a barrier to entry

when the cumulative volume of production of incumbent firms gives them cost advantages not enjoyed by potential entrants; these cost disadvantages of potential entrants can act as a barrier to entry; potential entrants must endure substantially higher costs while they gain experience

• 1. large numbers of competing firms that are roughly the same size
• 2. slow industry growth
• 3. lack of product differentiation
• 4. capacity added in large increments

meet approximately the same customer need, but do so in different ways; these place a ceiling on the prices firms in an industry can charge and on the profits firms in an industry can earn; ex. ESPN and a sports magazine

can threaten the performance of firms in an industry by increasing the price of their supplies (raw materials, labor, and other critical assets) or by reducing the quality of those supplies.

• 1. suppliers' industry is dominated by small number of firms
• 2. suppliers sell unique or highly differentiated products
• 3. suppliers are not threatened by substitutes
• 4. suppliers threaten forward vertical integration (a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to interacting directly with the final customers)
• 5. firms are not important customers for suppliers

• 1. number of buyer is small
• 2. products sold to buyers are undifferentiated and standard
• 3. products sold to buyers are a significant percentage of a buyer's final costs
• 4. buyers are not earning significant profits
• 5. buyers threaten backward vertical integration (a firm adds more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials)

• competitor: your customers value your product less when they have the other firm's product than when they have your product alone, ex. rivals, new entrants, and substitutes
• complementor: your customers value your product more when they have this other firm's product than when they have your product alone, ex. cable television companies and program-producing companies are complements

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; opportunity-->consolidation (strategy that reduces the number of firms in an industry by exploiting economies of scale)

newly created or newly re-created industries formed by technological innovations, changes in demand, the emergence of new customer needs, and so forth; opportunity-->first-mover advantages (advantages that come to firms that make important strategic and technological decisions early in the development of an industry)

firms that make early investments in particular technologies in an industry; firms may obtain a low-cost position based on their greater cumulative volume of production with a particular technology; firms may obtain patent protections that enhance their performance

first movers that move to tie up resources required to successfully compete in an industry before their full value is widely understood can gain sustained competitive advantages

exist when customers make investment tie customers to a particular firm and make it difficult for customers to begin purchasing from other firms; ex. computer software, drug side affects, grocery store (aisles), ext.

common characteristics are 1) slowing growth in total industry demand, 2) the development of experienced repeat customers, 3) a slowdown in increases in production capacity, 4) a slowdown in the introduction of new products or services, 5) an increase in the amount of international competition, and 6) an overall reduction in the profitability of firms in the industry; opportunities shift to refining a firm's current products, costs, and quality.

leadership, niche, harvest, and divestment

a firm's effort to refine and improve its current processes; designed to reduce manufacturing costs, increase product quality, and streamline management

a firm in a declining industry reduces its scope of operations and focuses on narrow segments of the declining industry gaining a favorable competitive setting

firm does not expect to remain in the industry over the long term and engages in long, systematic, phased withdrawal, extracting as much value as possible during the withdrawal period

extracts a firm from a declining industry; occurs quickly, often soon after a pattern of decline has been established

model of a firms performance that focuses on the resources and capabilities controlled by a firm as sources of competitive advantage

tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies; ex. factories, products, reputation

the tangible and intangible assets that enable a firm to take full advantage of the other resources it controls; ex. marketing skills, teamwork, cooperation among managers

for a given business activity, some firms may be more skilled in accomplishing this activity than other firms

some of the resource and capability differences among firms may be long lasting, because it may be very costly for firms without certain resources and capabilities to develop or acquire them

stands for four questions one must ask about a resource or capability to determine its competitive potential: the question of value, the question of rarity, the question of imitability, and the question of organization

do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external/environmental threat? yes-->strengths, no-->weaknesses

• how many competing firms already possess particular valuable resources and capabilities;
• is a resource currently controlled by only a small number of competing firms?;
• only when a resource is not controlled by numerous other firms is it likely to be a source or competitive advantage

do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?

• are a firm's other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources and capabilities?;
• ex. formal reporting structure (who reports to who), formal and informal management control systems (managers are behaving consistent with firm's strategies), and compensation policies (ways that firms pay employees-->incentives)

set of business activities in which it engages to develop, produce, and market its products or services

one reason it might be costly to imitate another firm's resources or capabilities; once time and history pass, firms that do not have space-and-time-dependent resources face a significant cost disadvantage in obtaining and developing them, because doing so would require them to re-create history; both first-mover advantages and path dependence can create this

when competitors cannot tell, for sure, what enables a firm to gain an advantage, that advantage may be costly to imitate; when competitive advantages are based on "taken-for-granted" resources and capabilities (teamwork is "invisible"), when multiple non-testable hypotheses exist about why a firm has a competitive advantage, and when a firm's advantages are based on complex sets of interrelated capabilities

when the resources and capabilities a firm uses to gain a competitive advantage involve interpersonal relationships, trust, culture, and other social resources that are costly to imitate in the short term

only a source of sustained competitive advantage in a few industries, including pharmaceuticals and specialty chemicals; this could decrease the cost of imitation because it reveals a significant amount of information about the product; by obtaining this a firm may provide important information to competitors about how to imitate its technology; restricts direct duplication for a time, but may actually increase the chances of substitution by functionally equivalent technologies

events early in the evolution of a process have significant effects on subsequent events; suggests that a firm may gain a competitive advantage in the current period based on the acquisition and development of resources in earlier periods because the resource wasn't at full value yet and others will have to pay its full value now

a valuable and rare resource or capability (but not costly to imitate) --> temporary competitive advantage

valuable, rare, and costly to imitate resources or capabilities --> sustained competitive advantage

• 1. the firm might have its own competitive advantage
• 2. the firm does not have the resources and capabilities (physical, financial, human, or organizational) to do so
• 3. the firm is trying to reduce the level of rivalry in the industry --> increasing the average level of performance for a firm in an industry

any actions a firm takes that has the affect of reducing the level of rivalry in an industry and that also do not require firms in an industry to directly communicate or negotiate with each other

• 1. small number of competing firms
• 2. homogeneous products and costs
• 3. market-share leader
• 4. high barriers to entry

cost leadership and product differentiation

a firm that focuses on gaining advantages by reducing its costs to below those of all its competitors

• 1. size differences and economies of scale (increase in firm size --> lower costs)
• 2. size differences and diseconomies of scale (too large --> increase costs)
• 3. experience differences and learning-curve economies
• 4. differential low-cost access to productive inputs
• 5. technological advantages independent of scale
• 6. policy choices

• with higher production volume...
• 1. firms can use specialized machines
• 2. firms can build larger plants
• 3. firms can increase employee specialization (high volumes of production --> high levels of employee specialization)
• 4. firms can spread overhead costs across more units produced
• ...which can lower per-unit production costs

• when the volume of production gets too large...
• 1. physical limits to efficient size
• 2. managerial diseconomies (managing and controlling operations gets too complex)
• 3. worker de-motivation (specialization --> removed farther from the finished product)
• 4. distance to markets and suppliers (location of big building --> transportation costs)
• ...can increase per-unit costs

link between cumulative volumes of production (how much a firm has produced over time) and average unit costs; costs continue to fall until they approach the lowest technologically possible cost; cost advantages --> increase in cumulative production has been associated with detailed learning about how to make production as efficient as possible; applies whenever the cost of accomplishing a business activity falls as a function of the cumulative number of times a firm has engaged in that activity

choices firms make about the kinds of products or services they will sell - choices that have an impact on relative cost and product differentiation position

• ability of a cost leadership position to neutralize external threats -->
• -A cost leadership competitive strategy helps to reduce the threat of new entrants by creating cost-based barriers to entry
• -firms with a low-cost position also reduce the threat of rivalry (low cost firms --> higher cost rivals)
• -cost leaders have the ability to keep their products and services attractive relative to substitutes (low priced products --> more attractive versus substitutes)
• -cost leadership based on large volumes of production and economies of scale can reduce the threat of suppliers
• -cost leaders can have their revenues reduced by buyer threats and still have normal or above-normal performance

an increased commitment by managers to an incorrect course of action, even as its limitations become manifest

under the Chief Executive Officer (CEO) are manufacturing-sales-research and development-human resources-legal

where one employee reports to two or more people

business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of other firms' products or services relative to the perceived value of other firms' products or services; this can be done by focusing directly on the attributes of its products or services, on relationships between itself and its customers, or on linkages within and between firms

product features (ex. automobile industry offers), product complexity (ex. more parts-->more valuable), timing of product introduction (ex. first mover) , location (ex. Disney in Orlando-->everything in one place), product customization (ex. software), consumer marketing (ex. "do the dew" focuses on extreme sports and used to be light morning dew on the mountains, the product didn't change though), product reputation (ex. MTV and reality shows), linkages among functions within a firm (coordination across functions to develop new thins), linkages with other firms (ex. firms sponsoring NASCAR), product mix (ex. malls), distribution channels (Ex. Coca-Cola in vending machines), and service and support (ex. a firm having their own customer service)

• low-cost duplication usually possible...
• -product features
• may be costly to duplicate...
• -product mix
• -links with other firms
• -product customization
• -product complexity
• -consumer marketing
• usually costly to duplicate...
• -links between functions
• -timing
• -location
• -reputation
• -distribution channels
• -service and support

temporary teams whose creative efforts are intensive and focused; the team is relieved of all other responsibilities in the firm and focuses all its attention on developing a new innovative product or service; the joke is the members were so engaged that these teams actually would forget to shower