adms4900 3.0 - midterm notes student

8/10/2019 ADMS4900 3.0 - Midterm Notes Student

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Chapter 1: Creating Competitive Advantages

General Manager Role

1) Assess Performance2) Set DirectionVision, Mission, Strategy, Policies, Procedures3) Build Certain Capabilities4) Implement ChangeUncertainty, Complex, Resistance Assess (go to 1)

What is Strategic Management?

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The strategic management of the organization must become both a process and a way of thinking throughout theorganization.o How can I contribute to make our firm outperform others?o The challenge to managers is (1) decide on strategies that provide advantages which can be sustained over

time and (2) effectively execute those strategies

Strategic ManagementStrategic management consists of the analysis, decisions, and actions an organization undertakes order to create and sustain competitive advantages.

Competi tive AdvantageIs what makes a companys offerings superior to those of its competitors.Can provide products/services of superior quality that may incorporate unique and valuable features, be customized to addre

specific customer needs more closely, or be lower priced.

Four Key Attributes of Strategic Management

1. Strategic management is dir ected toward overall organi zational goals and objectives2. Strategic management includes mul tiple stakeholders in decision-making3. Strategic management incorporates both short- term and long- term perspectives.4. Strategic management involves the recogniti on of trade- of fs between effectiveness and eff ici ency.

Strategic Management Process- Ongoing processes (analysis, decisions, and actions, often referred to as strategy analysis [analysis], strategy

formulation [decisions], and strategy implementation [actions]) are highly interdependent.

1. Strategy Analysis (analysis): May be looked upon as the starting point of the strategic management process.

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It consists of the advance work that must be done in order to effectively formulate and implement strategies. -

About understanding what is going on, why situations have unfolded in particular ways, what issues the organization

faces at present and in the future, whether and why the organization has been successful, and what others may bedoing and why.

2. Strategy Formul ation (decision): Overall strategy is developed at several levels.

- First, business-level strategyaddresses the issue of how to compete in given business environments to attain

competitive advantage.- Second, corporate- level strategy focuses on two issues:

o (1) which businesses to compete in (2) how businesses can be managed to achieve synergythe creation of

more value by working together rather than operating as stand- alone businesses

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Third, a firm must determine the best method for developing international strategies as it ventures beyond its nationaboundaries.

o

Decide not only on the most appropriate entry strategy but also how they will go about attaining competitive

advantages in inter-national markets.- Fourth, digital technologies, such as the Internet and wireless communications, are changing the way business is

conducted and present both new opportunities and threats for virtually all businesses.

3. Strategy Implementation (actions): Encompasses the systems, structures, attitudes and behaviours that make things

happen within organizations. Calls on firms to adopt organizational structures and designs that are consistent withtheir strategies.


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Mintzbergproposed an alternative model of strategy development.- Realized strategy and intended strategy usually not the same.

- Decisions deriving from analysis constitute the intended strategyof the firm. They rarely survive in its original formas unforeseen environmental developments, unanticipated resource constraints, or changes in managerial preferencemay result in at least some parts of the intended strategy remaining unrealized.

- On the other hand, good managers will want to take advantage of a new opportunity presented by the environmenteven if it was not part of the original set of intentions.

- New technologies and green solutions to environmental challenges; such strategic moves do not necessarilyconstitute parts of the original strategies of firms and can be opportunistic responses to unfolding events, but they are

certainly parts of an emergent strategy.- Thefinal realized strategyof any firm is a combination of deliberate and emergent strategies.

Role of Corporate Governance and Stakeholder Management

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Overall purpose of a corporation is to maximize shareholder value, which is reflected in the long- term return to theowners or shareholders.- Define corporate governanceas the relationship among various participants in determining the direction and

performance of corporations.

o The primary participants are (1) the shareholders, (2) the management (led by the chief executive officer), an(3) the board of directors.

o Board of directorsconsists of the elected representatives of the share-holders. They are charged withoverseeing management and ensuring that the interests and motives of management are aligned with those othe owners (shareholders).

- Stakeholders are affected by what an organization does and can influence, to varying degrees, its performance.

- Role of management is to look upon the various stakeholders as competing for the attention and resources of the

organization.

- Corporate Social Responsibi li tycalls on firms to consider the changing relationships between business, society, andgovernment, and to act in a socially responsible manner. Social responsibi li tyis the expectation that businesses or

individuals will strive to improve the overall welfare of society.- As social norms and values change, a corporations actions that constitute socially responsible behaviour change as

- Adopted tri ple bottom line, a technique that involves assessing financial as well as environmental and socialperformance.

o The first bottom linepresents the financial measures with which all leaders are familiar.o

The second bottom lineassesses ecological and material capital.o The third bottom linemeasures human and social capital.

Strategic Management Perspectives: An Imperative Throughout the Organization

- Strategic management requires managers to take an integrative view of the organization and assess how all of thefunctional areas and activities fit together to help the organization achieve its goals and objectives.

- Driving forces are increasing the need for a strategic perspective and greater involvement throughout the organizatio

1. Globalization: The defining feature of the global economy is not the flow of goods, international trade has existed fo

centuries, but the flow of capital, people, and information worldwide.2. Technology: Such developments accentuate the importance of innovation for firms if they are to remain competitive

- Continuous technological development and change shrink product life cycles.


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3. I ntellectual Capital: Knowledge has become the direct source of competitive advantage for companies selling ideas

and relationships as well as for all companies trying to differentiate from rivals by how they create value for their

customers.

- Senge notes the critical need for three types of leaders:1. Local l ine leaderswho have significant profit and loss responsibility.2.

Executi ve leaderswho champion and guide ideas, create a learning infrastructure, and establish a domain for

taking action.3. I nternal networkerswho, although having little positional power and formal authority, generate their power

through the conviction and clarity of their ideas.

Ensuring Coherence in Strategic Direction

- To be successful, employees and managers throughout the organization must be striving for common goals andobjectives.

- By specifying desired results, it becomes much easier to move forward.- Organizations express priorities best through stated goals and objectives that form a hierarchy of goals.

1. Organizational Goal: Described as a goal that is massively inspiring, overarching, and long- term.

- Difficult to accurately measure how well such visions are being achieved, but provide a fundamental statement of an

organizations sense of its own purpose and reflect the collective values of its stakeholders, their aspirations, and thegoals.

- A good vision statementtellseverybody, both inside and outside the organization, what it stands for, what inspires itmanagement and employees, and what gets them going and motivates them to strive to excel.

- Visions fail for many reasons:

o The Walk Doesnt Match theTalk:o I rr elevance:o Not the Holy Grail:

o An I deal Future Irr econcil ed with the Present:

2. Mission: Encompasses both the purpose of the company as well as the basis of competition and competitiveadvantage.

3. Strategic Objectives: Used to operationalize the mission statement.o

For an objective to be meaningful, it needs to satisfy several SMARTcriteria. It must be:

o

Specific: Provide a clear message as to what needs to be accomplished (market share, new productintroductions, customer satisfaction scores).

o Measurable: Contain indicators that explicitly measure progress toward fulfilling the objective (15 percentmarket share; 3 new product launches; 10 percent increase in customer retention).

o Appropriate: Connect and be consistent with the vision and mission of the organization.o Realistic: Identify an achievable target given the organizations capabilities and opportunities in the

environment.

o Timely: There needs to be a time frame for accomplishing the objective. Unless there is a timeline forachieving the objective, there is little value in setting goals (3 new product launches every 6 months, marketleadership in 5 years).

When objectives satisfy the above SMARTcriteria, there are many benefits for the organization:

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Help direct employees throughout the organization toward common goals. This helps to concentrate and conservevaluable resources in the organization and to work collectively in a timelier manner.

- Help to motivate and inspire employees throughout the organization to higher levels of commitment and effort.- Always the potential for different parts of an organization to pursue their own goals rather than overall company

goals.

- Provide a yardstick for rewards and incentives. They will lead to higher levels of motivation by employees; will alsohelp to ensure a greater sense of equity or fairness when rewards are allocated.


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Chapter 2: Analyzing the External Environment of the Firm

Creating the Environmentally Aware Organization- To become mentally aware, managers use three important processes1.scanning, 2.monitoring, and 3.gathering

competitive intelligenceto understand the environment and develop forecasts.

1. Envi ronmental Scanning: Involves surveillance of a firms external environment to predict future environmental

changes and detect changes already under way.- Successful environmental scanning alerts the organization to critical trends and events before the changes have

developed a discernible pattern and before competitors recognize them.-

Ex. Key issues in the auto industry include:o

Globalization: Intensified with enormous opportunities opening up in Asia, central/eastern Europe, and Lati

America.

o Time to Market: Gap still exists between product development cycles in the US and Europe compared toJapan. This gap persists even though Japanese companies continue to move operations to other countries.

o

Shifting Roles and Responsibilities: Design responsibility, purchasing, even project management and systemengineering, are shifting from the original equipment manufacturers to integrators and other suppliers.

2. Environmental Monitori ng: Tracks the evolution of environmental trends, sequences of events, or streams of

activities.

3. Competit ive I ntell igence: Helps firms better define and understand their industry, also identify rivals

strengths/weaknesses.- Includes the intelligence gathering associated with the collection of data on competitors and the interpretation of suc

data for managerial decision-making.-

Helps a company avoid surprises by anticipating competitorsmoves and decreasing response time.

4. Envi ronmental Forecasting: Involves the development of plausible projections about the direction, scope, speed, anintensity of environmental change.Environmental forecastingspurpose is to predict change.

- Asks, how long will it take a new technology to reach the marketplace? Will the present social concern about an issuresult in new legislation? Are current lifestyle trends likely to continue?

5.

Scenari o Analysis: More in-depth approach to forecasting. Draws on a range of disciplines and interests, among themeconomics, psychology, sociology, and demographics.

- It usually begins with a discussion of participants thoughts on ways in which societal trends, economics, politic s, antechnology may affect the issue under discussion.

SWOT Analysis: One of the most widely used if not basic techniques for analyzing firm and industry conditions.- Stands for Strengths, Weaknesses, Opportunities, and Threats. Provides a framework for analyzing those four

elements of a companys internal and external environment.- Managers rely on SWOT to stimulate self-reflection and group discussions about how to improve their firm and

position it for success.

- Use it regularly to identify and evaluate the opportunities and threats in the business environment as well as thestrengths/weaknesses of their firms internal environment.

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Not all trends, opportunities, and threats apply equally to all companies within an industry, and one firms SWOTanalysis is not applicable to another.

- Specific trends may benefit some companies while they harm others.- SWOT analysis is not the unquestionable solution to strategic planning and should not be an end in itself. It is a

framework that allows a manager to classify issues and observations in a meaningful and useful way.

- It does have its limitations. It is simply a starting point for discussion.- Cannot yield environmental forecasts nor show managers how to achieve a competitive advantage.

- SWOTs value lies in providing a systematic framework to initiate discussion among thoughtful managers who arecontemplating the challenges and opportunities facing their firm.


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The General Environment- Composed of factors that can have dramatic effects on a firms strategy and critically affect its performance.

- Firm has little ability to predict trends and events in the general environment and even less ability to control them.- Divide the general environment into 6 segments:

1. Demographic/Psychological: Root of many changes in society.-

Demographicsinclude elements such as the aging population, rising or declining affluence, changes in ethnic

composition, geographic distribution of the population, and disparities in income level.- Psychographicsreflect the various attitude and interest differences among individuals and complement the

demographic characteristics of the population. Capture the variance among many different individuals who maybelong to a particular group, such as urban professionals, college students, and stay- home fathers, but vary widely itheir perceptions, priorities, and the ways they interpret and react to external events.

2. Sociocultural: Influence the values, beliefs, and lifestyles of a society.

- Ex. Higher percentage of women in the workforce, dual- income families, increases in the number of temporaryworkers, greater concern for healthy diets and physical fitness, greater interest in the environment, and postponemenof having children.

3. Political/Legal: Define the regulations with which industries must comply.

- Include environmental regulation, occupational health and safety legislation, immigration policies, deregulation ofutilities and other industries, and increases in provincially mandated minimum wages.

4.

Technological: Developments in technology lead to new products and services and improve how they are producedand delivered to the end user. Innovations can create entirely new industries and alter the boundaries of existing

industries.

5. Economic: Economy has an impact on all industries, from suppliers of raw materials to manufacturers of finishedgoods and services as well as all organizations in the service, wholesale, retail, government, and non- profit sectors.

- Key economic indicators include interest rates, unemployment rates, the consumer price index, the gross domestic

product, and net disposable income. Other economic indicators are associated with equity markets.

6. Global: Increasing trend for firms to expand their operations and market reach beyond the borders of their homecountry.

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Globalization provides opportunities to access larger potential markets and a broader base of factors of production

such as raw materials, labour, skilled managers, and technical professionals.

The Competitive Environment- Managers must also consider the competitive environment, sometimes referred to as the task or industry environmen

Porters Five-Forces Model of the Industry Competition- Porter model has been the most commonly used analytical tool for examining the competitive environment.

- It describes the competitive environment in terms of five basic competitive forces:

1. The threat of new entrants.

- Refers to the possibility that new competitors may erode the profits of established firms in the industry.-

The extent of the threat depends on existing barriers to entry and the combined reactions from existing competitors.

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If entry barriers are high and/or the newcomer can anticipate a sharp retaliation from established competitors, thethreat of entry is low. These circumstances discourage new competitors. There are six major sources of entry barriers

o A)Economics of Scale:Refer to spreading the costs of production and other business activities over a large number of units produceThe per-unit cost of a product typically decreases as the absolute volume produced within a period increases

o B)Product Differentiation:

When existing competitors have strong brand identification and customer loyalty, differentiation creates abarrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties.Building a brand requires enormous investment, takes time, and is of course fraught with risk.


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Where the product or service is perceived as a commodity or near commodity, the buyers choice is typicallbased on price, service, and well- defined features, resulting in pressures from intense price and ser-vice

competition.Lack of switching costs has the same effect, as competitors can easily replace each others product offerings

o E) Capacity augmented in large increments.

Where economies of scale require that capacity must be added in large increments, capacity additions can be

very disruptive to the industry supply/ demand balance.

o

F)High exit barriers.Exit barriers are economic, strategic, and emotional factors that keep firms competing even though they maybe earning low or negative returns on their investments.

Some exit barriers are specialized assets, fixed costs of exit, strategic interrelationships (relationships betwethe business units and others within a company in terms of image, marketing, shared facilities, and so on),

emotional barriers, and government and social pressures (governmental discouragement of exit out of concefor job loss).

Porters Five-Forces Model of Industry Competition

Industry Dynamics

- One of the criticisms often levelled against traditional industry analysis is that it is static, while the competitivelandscape undergoes very rapid changes due to technological developments, shifting customer preferences, changes

the regulatory environment, as well as competitive moves of the incumbents.-

An industry whose core activities or core assets face obsolescence will follow one of four change paths.

o A) Radical Change (FedEx Delivery): Occurs when core activities and core assets both face the threat ofobsolescence.Ex. The overnight delivery industry is experiencing this problem. Availability of cheap and instantaneous

document delivery through fax machines and the Internet has made the core assets (delivery trucks, airplane

and a central hub) and core activities (document tracking) of firms such as FedEx suddenly less relevant.

o B) Creative Change (Pharmaceutical I ndustry): When core assets are threatened but core activities are notEx. Include the film production industry, the pharmaceutical industry, oil and gas exploration, and pre-

packaged software. There is rapid asset turnover but relatively stable relationships with suppliers andcustomers. In the pharmaceutical industry patents for some drugs expire while new drugs are approved, butthe core activities of commercialization and marketing continue to be relevant.

o C) I ntermediating Change (Car dealership): Occurs when core assets are not threatened but core activities

are.Ex. Automobile dealerships as customers can get all the information they need online. Second, as the quality


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and longevity of cars improve, individual purchases have become less frequent. Car manufacturers areincreasingly sharing the task of customer relations with the dealers, and, in some cases, they have even

completely taken over this function. Finally, inventory management and financing are now subject tosignificant economies of scale which only large, integrated companies can take advantage of.

o D) Progressive Change: Occurs in industries where neither core assets nor core activities face imminent

threat of obsolescence. Change does occur, but it is within the existing framework of the industry.

Ex. Commercial airline industry and the discount retailing industry. Their suppliers and the customers havenot changed, the core assets and activities have changed only incrementally, but over the last decade both

these industries have experienced significant changes.

Four Evolutionary Trajectories of Industry Change

- When faced with radical or intermediating changes, it is wise to aggressively pursue profits in the near term whileavoiding investments that could reduce strategic flexibility in the future.

- Another response isforming alliances, often with rivals, to protect common interests and defend against newcompetition.

- Diversification can also be an effective solution for firms facing radical change.- Firms facing intermediating change must find unconventional ways to extract profits from their core assets.- Firms facing creative change include spreading the risk of new-project development over a portfolio of assets or

outsourcing project management and development tasks.

Strategic Groups within Industries- In an industry analysis, two assumptions are unquestionable: (1) no two firms are totally different and (2) no two

firms are exactly the same.-

The analysis can be enhanced by identifying groups of firms that are mostly similar to each other, which are known strategic groups.

- Important because rivalry tends to be greater among firms that are alike.- Ex. Canadian Tire is more concerned about Wal-Mart than Holt Renfrew, Mercedes is more concerned about BMW

than Hyundai, and the Hudsons Bay Company is more concerned about Sears than Club Monaco.- Classifying an industry into strategic groups involves judgment.- Dimensions include breadth of product and geographic scope, price/quality, degree of vertical integration, type of

distribution (dealers, mass merchandisers, private label), and so on.Benefits of Strategic Grouping

1. Mobility barriers are factors that deter the movement of firms from one strategic position to another.o Strategic groupings help a firm identify barriers to mobility that protects a group from attacks by other

groups.2. Helps a firm identify groups whose competitive position may be marginal or weak.3. Help chart the future directions of firms strategies. Arrows emanating from each strategic group can represent the

direction in which the group (or a firm within the group) seems to be moving.4. Helpful in thinking through the implications of each industry trend.


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Chapter 3

Value- chain

- Analysis views the organization as a sequential process of value- creating activities.

- Includes various necessary inputs to create the product offering that the firm brings to the marketplace

- Disaggregates a firm into its various activities in order to understand the ways all inputs are deployed and costs are

incurred in creating a firms products and services.

- This also helps in creating a competitive advantage for the firm

Porter describes two different categories of activities:

1. Primary activities

- Inbound logistics

- Operations

- Outbound logistics

- Marketing and sales

- Servicecontribute to the physical creation of the product or service, its sale and transfer to the buyer, and itsservice after the sale.

Inbound Logistics- Inbound logistics are primarily associated with receiving, storing, and distributing inputs to the product

- Include material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers.

- Just- in- time (JIT) inventory systems, for example, were designed to achieve efficient inbound logistics.

Operations

- activities associated with transforming inputs into the final product form, including machining, packaging, assemblytesting, printing, and facility operations

- Creating environmentally friendly manufacturing is one way a firm can use operations to achieve competitiveadvantage.

Outbound Logistics

-Activities of outbound logistics are associated with collecting, storing, and distributing the product or service to

buyers.

- Includes finished goods, ware-housing, material handling, delivery vehicle operation, order processing, andscheduling

Marketing and sales

- Efforts a firm engages in to gather market intelligence and understand its customers

- the activities associated with purchases of products and services by end users

- the inducements used to get them to make purchases

- Include market research, consumer analysis, advertising, promotion, sales force, quoting, channel selection, channelrelations, and pricing


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Service

- Service consists of the range of activities associated with enhancing or maintain the value of the product, such asinstallation, maintenance, support, repair, training, parts supply, and product adjustment

- Example: can add value through customer service

2. Support Activities

(Relationships between functional groups)

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procurement- technology development

- human resource management

- Firm infrastructureeither adds value by them or add value through important relationships with both primary

activities and other support activities.

Procurement

- refers to the function of purchasing inputs to be used in the firms value chain

- Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery,laboratory equipment, office equipment, and buildings.

- Important to note it is not looking at the items themselves, but the purchasing of the items

- *For example:say you are purchasing inputs from a supplier, if you are able to improve the quality of your suppliers

this improves your procurement as well

Technology Development

- Every value activity embodies technology

- Technologies employed can be very broad within organizations

- Ranging from technologies used to prepare documents and transport goods to those embodied in processes andequipment or the product itself

- Technology development related to the product and its features supports the entire value chain

- Other technology development is associated with particular primary or support activities.

- Example Wall-marts use of inventory system technology the supports there inbound activities

Human Resource Management

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Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel- supports both primary and support activities ( e. g., hiring of engineers and scientists) and the entire value chain ( e. g.

negotiations with labour unions)

General Administration

- Consists of a number of activities, including general management, planning, finance, accounting, legal and governmenaffairs, quality management, and information systems. Administration typically supports the entire value chain andnot individual activities.

- Administrative activities can be also viewed as competitive advantage effective information systems can contribute

significantly to cost position, while in some industries, top management plays a vital role in dealing with importantbuyers.

Resource base of the firm

- To carry out the basic activities of the value chain, the firm needs resources

- firms resource base comprises all the inputs necessary for the performance of each of the activities, irrespective of whowns or controls those resources

- firm may sometimes contract for certain resources and other resources they own

Two Perspective to RBV (resource based view)

1.the internal analysisof phenomena within a company2.an external analysisof the industry and its competitive environment.

- Goes into greater context compared to just a swot analysis. Swot tells you a companys strength but doesnt tell you toturn it into a competitive advantage


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Some benefits of RBV include:

- very useful framework for gaining insights on why some competitors are more profitable than others

- helpful in developing strategies for individual businesses and diversified firms since it reveals how core competenciesembedded in a firm can help it exploit new product and market opportunities

- * RBV explicitly directs managers to integrate the internal and external perspectives and helps them develop strategies

that build on core competencies and enable the firm to achieve sustainable competitive advantages

Resources include all assets, capabilities, organizational processes, information, knowledge, systems, and so forth

controlled by a firm, which enable it to develop and implement value- creating strategies.

3 key Types of Resources Firms Poses

Tangible Resources

- Assets that are relatively easy to identify, measure, and value are called tangible resources

- Include concrete, physical assets such as real estate, cash, production facilities and equipment, raw materials, andcomponents

- value arises from their physical characteristics such as their location, capacity, and features

Intangible Resources

- Assets that are harder to identify and quantify are called intangible resources

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not concrete and can be elusive; yet, they are potentially invaluable inputs into a firms operations- include brand names, company reputations, knowledge, technology, patents, copyrights and trademarks, trade secrets,

expertise, and experience

- Intangible resources are much more difficult for competitors (and for a firms own managers) to account for or imitatesince they are typically embedded in unique routines and practices that have evolved and accumulated over time

Organizational Capabilities resource

- Organizational capabilities are not specific tangible or intangible assets but the competencies and skills that a firm

employs to transform those assets into outputs

- Examples of organizational capabilities are lean manufacturing, excellent product development capabilities, superbinnovation processes, and flexibility in manufacturing processes

- In some cases, a resource or capability helps a firm to increase its revenues or to lower costs, but the firm derives only

temporary advantage because competitors quickly imitate or substitute for it

4 criteriasfor Assessing Resources and capabilities

*Resource or capability must have these attributes in order to provide a sutainable competitve advantage

Advantage based on inimitability wont last forever either. Competitors will eventually discover a way to copy most valuableresources


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Managers can fore-stall this and sustain profits for a while longer by developing strategies around resources that hav

at least one of the following four characteristics

1)Physical uniquenessis inherently difficult to copy. Examples: beautiful resort location, mineral rights, or Merck &Co.s pharmaceutical patents simply cannot be imitated

2)Path dependencythat resources are unique and, therefore, scarce because of all that has happened in the course oftheir development and/ or accumulation

3)

Casual ambiguityInimitability may also arise because it is impossible to disentangle the causes or possible

explanations for either what the valuable resource is or how it can be recreated- In many cases, causally ambiguous resources are organizational capabilities.

4)

Social complexity firms are socially complex making it hard to imitate

Examples include interpersonal relationsamong the managers of a firm, its culture (ex.zappos), or its reputation with its suppliers and customers

Are substitutes readily available?

- Very different resources can become strategic substitutesonline sellers, such as Amazon. ca, diminish theuniqueness of prime retail locations by substituting bricks- and- mortar locations with the convenience of the Interne

4 factor Employees and Manager can generate a higher profit

1.Employee bargaining power

- If employees are vital to forming a firms unique capability, they will earn disproportionately high wages (for examplif employees know vital information, they have more power of earning higher wages)

2.Employee replacement costs

- If employees skills are idiosyncratic and rare (a source of resource-based advantage), they should have high bargaininpower, based on the high cost required by the firm to replace them

3.Employee exit costs

- This factor may tend to reduce an employees bargaining power. An individual may face high personal costs whenleaving the organization (other things to take into consideration is that some employee skills may be more applicablefor that job, but other employers may see it as limited value)

4.Manager Bargaining Power

- managers power would be based onhow well they create resource-based advantages

- They are generally charged with creating value through the process of organizing, coordinating, and leveragingemployees as well as other forms of capital such as plant, equipment, and financial capital

Evaluating firm performance

- Two approaches to evaluate a firms performance(1) financial ratio analysis, which, generally speaking, identifies how a firm is performing according to its balance sheet

and income statement

- When performing a financial ratio analysis, managers must take into account the firms performance from a historicalperspective (not just at one point in time) as well as the way in which it compares with industry norms and key

competitors(2) Broader stakeholder perspective Firms must satisfy a broad range of stakeholders, including employees, customer

and owners, to ensure their long- term viability

Financial ratio analysisneed to analyze 5 different types1. Short- term solvency or liquidity2.Long- term solvency measures

3.Asset management (or turnover)4.Profitability5. Market value

Financial analysis of ratios must go beyond just looking at the ratios for example you should look a ratios over a time

period to see how ratios are changing


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Historical Comparisons

- When managers evaluate a firms financial performance, it is very useful to examine changes in its financial position

over time

- This provides means of evaluating trends

Comparison with industry trends

- A company may compare its financial performance to other firms, but when compared to industry norms you may seeyour company performance may not be that great

- By comparing to all firms in an industry, we can calculate relative performance

Comparison with Key competitors

- we can gain valuable insights into a firms financial and competitive position if we make comparisons between a firmand its most direct competitors

- firms that have similar strategies fall into a strategic group of an industry

The BALANCE SCORECARD (this integrates the financial ratio perspective with broader stakeholder perspective)

- The balanced scorecard enables managers to consider their business from four key perspectives(1) Customer perspective: How do customers see us?

(2) Internal business perspective: What must we excel at?(3)

Innovation and learning perspective: Can we continue to improve and create value?

(4)

Financial perspective: How do we look to shareholders?

Chapter 4 Recognizing a firms intellectual assets

Central Role of Intellectual Capital in todays Economy

- More than 50% of GDP of developed economies is knowledge based

(The machine age was a physical world. It consisted of things. Companies made and distributed things (physical products).Management allocated things (capital budgets); management invested in things (plant and equipment)]

- In the knowledge economy, wealth is increasingly created through the effective management of intellectual assets andknowledge workers instead of by the efficient control of physical and financial assets

-

In essence, paying for a set of talents, capabilities, skills, and ideasintellectual capitalnot physical and financialresources

- How do companies create this value in knowledgeintensive economy? The answer rests on their ability to managtheir intellectual assets and attract and effectively leverage human capital through mechanisms that create productsand services of value.

Types of Intellectual knowledge

Two Types of Knowledge

(1) Explicit knowledge (rules)(2) Tactic knowledge (selling strategy)

Explicit Knowledge (rules)

- explicit knowledge that is codified, documented, easily reproduced, and widely distributed

- Examples include engineering drawings, software code, sales collateral, and patents


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Tactic Knowledge (selling strategy)

- knowledge that is, in essence, in the minds of employees and is based on their experiences and backgrounds

- Tacit knowledge is shared only with the consent and participation of the individual

Intellectual Property

- Ideas, innovations, and creations contribute to sustainable competitive advantage only when a firm is able to protect itexclusive right to extract value from them for a long period of time and prevent others from copying or imitating thefor their own benefits

-

For example

trademarks, copyrights etc.

New knowledge

- is constantly being created in organizations. It involves the continual interaction of explicit and tacit knowledge

- For example, creating a computer code, the computer code in itself is explicit knowledge, however the ideas based onindividuals experience is tacit knowledge. When the code is revised and other details may be added this would beconsideredNew Knowledge

- new knowledge is created as they make modifications to the existing code

Human Capital: Foundation of intellectual capital

- organizations must recruit talented peopleemployees at all levels with the proper sets of skills and capabilitiescoupled with the right values and attitudes

-

all three legs of the diagram are significantly interlinked. If one leg breaks the whole chain breaks.

Identifying with organizations MISSION and Values

- People who identify with and are committed to the core mission and values of the organization are less likely to stray bolt to the competition

Financial and Non financial rewards and incentives

- Financial rewards are vital to organizations. Money (whether in the form of cash/stocks/prizes) mean different things employees likesecurity, freedom, recognition, etc.

- Most surveys say money is not the main issue why employees leave

- Non- financial rewards even involve accommodating working families with children. Coping with the conflictingdemands of family and work is a problem at some point for virtually all employees

The vital role of social capital

- social capital ( that is, the friendships and working relationships among talented individuals) becomes increasinglyimportant as it helps tie knowledge workers to a given firm

- Knowledge workers often exhibit greater loyalties to their colleagues and their profession than to their employingorganization (therefore the firm needs create TIES with its knowledge workers)

How social capital and helps attract and retain talent

- Hiring via personal networksis the process where an organization will hire job candidates particularly if they are seenas having the potential to bring with them a raft of valuable colleagues.

- Leaders must be aware of social relationships among professionals as important recruiting and retention mechanisms


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- Social networks can provide an important mechanism for obtaining both resources and information from individualsand organizations outside the boundary of a firm

Potential downside of Social capital

- Some companies have been damaged by high social capital that breeds groupthinka tendency not to questionshared beliefs

- When people identify strongly with a group, they sometimes support ideas that are suboptimal or simply wrong

- An excess of warm and fuzzy feelings among group members prevents people from challenging one another withtough questions and discourages them from engaging in the creative abrasion

Using technology to leverage human capital and knowledge

- Technology can be used to leverage human capital and knowledge within organizations as well as with customers andsuppliers beyond their boundaries

Codifying Knowledge for competitive advantage

- One of the challenges of knowledgeintensive organizations is to capture and codify the knowledge and experiencethat, in effect, resides in the heads of its employees

- The use of information technology to codify knowledge can also help a firm to integrate its internal value- chainactivities with its customers and suppliers

Retaining knowledge when employees leave

-

Information technology can often help employers cope with turnover by saving some tacit knowledge that the firmwould otherwise lose

- Example: Customer relationship software, for example, automates sales and provides salespeople with access to clienthistories, including prior orders and complaints. This enables salespeople to quickly become familiar with client

accounts (about which they might otherwise know nothing)

Chapter 5: Business Level Strategy

- Without competitive advantages, firms are only able to earn, at best, economic profits - the level of normal returns

that they could expect from any investments that have the same level of risk.- Strategy formulationis about the processes and the decisions managers make to address (1) the choices of businesse

in which to compete and(2) how to compete in these businesses.

-

Business- level strategyis essentially about the particular ways a firm competes in its chosen business. A firmpresumably chooses to compete in certain ways in order to create superior value as compared to competitors. Thesuperiority is manifested in the market places response to its products and services.

Types of Competitive Advantage and Sustainability- Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive

advantage.

1. Over-all Cost Leadership: Based on creating a low- cost position relative to a firms peers.-

Firm must manage the relationships throughout the entire value chain, devoted to lowering costs throughout the entirchain.


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2.

Differentiation: Requires a firm to create products/services that are unique and valued as such in the eyes of itscustomers.

- Primary emphasis is on non-price attributes for which customers will gladly pay a premium.

3. FocusStrategy: Direct its attention toward narrow product lines, buyer segments, or targeted geographic markets.- Must attain advantages either through differentiation or a cost leadership approach.

o

Overall cost leadership and differentiation strategies strive to attain advantages industry-wide,

o Focusers build their strategy with a narrow target market in mind.

-

Firms that identify with one or more of the forms of competitive advantage that Porter identified, outperform thosethat do not.o

The lowest performers were those that did not identify with even a single type of advantage. Classified as

stuck in the middle- that is, unable or unwilling to make choices about how to compete, having tried to doeverything and accomplishing nothing particularly well.

- When a firm decides to pursue one type of competitive advantage (low cost), it must attain parity on the basis of theother competitive advantages (differentiation) relative to competitors.

o *To generate above- average performance, a firm following an overall cost leadership position needs to beable to stay on par with competitors with respect to differentiated products.

- Two important concepts related to the overall cost leadership strategy:o Economies of scale:Refer to the decline in per unit costs that usually come with larger production runs, larg

facilities, and allocating fixed costs (marketing and research and development) across more units produced.o

Experience curve:Refers to how a business learns to lower costs as it gains experience with productionprocesses. In most industries, with experience, unit costs of production decline as output increases.

- Process improvements involve identifying the best practices in other industries and adapting them for implementatio

in ones own firm. When firms benchmark competitors in their own industry, the end result is often copying andplaying catch- up.

Improving Competitive Position vis- - vis the Five Forces- Enables a firm to achieve above-average returns despite strong competition.

- It protects a firm against rivalry from competitors because lower costs allow a firm to earn returns even if itscompetitors eroded their profits through intense rivalry.

-

A low- cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only t

the level of the next most efficient producer.- Provides more flexibility to cope with demands from powerful suppliers for input cost increases.

Potential Pitfalls- Too much focus on one or a few value- chain activities.

o Firms need to pay attention to all activities in the value chain to manage their overall costs. Too often,managers make big cuts in operating expenses but dont question year- to- year spending on capital projects

- A common input or raw material among rivals.o Firms that compete on overall low- cost strategies are vulnerable to price increases in the factors of

production. Are less able to pass on price increases because customers can easily move to competitors who

have lower prices.-

A strategy that is imitated too easily.

o

Firms strategy may consist of value- creating activities that are easy to imitate.- A lack of equivalence on differentiation.

o Firms endeavouring to attain cost leadership advantages need to obtain a level of equality on differentiation- Erosion of cost advantages when the pricing information available to customers increases.

o

Becoming a more significant challenge as the Internet dramatically increases the volume of information

available to consumers about pricing and cost structures.

1. Differentiation: Consists of creating differences in the firms product or service offering by creating something that perceived industry-wide as unique and valued by customers. Takes many forms:

o

Prestige or brand image (BMW).

o Quality (Presidents Choice).


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o

Technology (Martin guitars).o Innovation (Medtronic medical equipment/Cirque du Soleil).

o Features (Cannondale bicycles/Honda Goldwing motorcycles).o Customer Service (Four Seasons Hotels and Resorts).

o Dealer Network (Lexus/Canadian Tire).*Firms achieve and sustain differentiation advantages and attain above- average performance when their price

premiums exceed the extra costs incurred in being unique. (ex. Apple)

- It must attain a level of cost parity relative to competitors. Can do this by reducing costs in all areas that do not affecdifferentiation.

Potential Pitfalls of Differentiation Strategies-

Uniqueness that is not valuable.

o Must provide unique bundles of products/services that customers value highly. Its not enough just to bedifferent.

- Too much differentiation.o Firms may strive for quality or service that is higher than customers desire, leaving themselves vulnerable to

competitors who provide an appropriate level of quality at a lower price.-

Too high a price premium.o Customers may desire the product, but be repelled by the price premium compared to that of competitors.

- Differentiation that is easily imitated.o Resources that are easily imitated cannot lead to sustainable advantages. Firms may strive for, and even atta

a differentiation strategy that is successful for a time; however, the advantages are eroded through imitation.(Flyer miles and loyalty cards)

- Dilution of brand identification through product- line extensions.

o Firms may erode their quality brand image by adding products or services with lower prices and less qualityAlthough this can increase short- term revenues, it may be detrimental in the long- run. Can tarnish the

sterling brand.- Perceptions of differentiation that vary between buyers and sellers.

o Companies must realize that although they may perceive their products and services as differentiated, their

customers may view them as commodities.

2. Focus: Based on the choice of a narrow competitive scope within an industry. Selects a segment or group of segmenand tailors its strategy to serve them.

o Cost Focus: Strives to create a cost advantage in its target segment and serve customers within that segment

with a lower price than rivals who may either target the whole industry or be unable to match the lower- cosposition.

Exploits differences in cost behaviour in a particular segment and takes advantage of potentiallylower costs that arise from purposefully limiting the firms customer base to a well- defined segmen

o Differentiating Focus: Seek to differentiate itself within a narrow segment. Aims to provide better service,

prestige, image, or quality to a well- defined segment. Ex. Keg Steakhouse & Bar has developed a simple operating formula that serves it with a stable

business, and its customers with perfect steaks, every time. Has purposefully limited its menu and hstayed away from food fashions and fads such as nachos and pizzas; it targets young families and thaprs- work crowd.

Potential Pitfalls

-

Erosion of cost advantages within the narrow segment.o Advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time.

- Possible competition from new entrants and from imitation.o

May enjoy temporary advantages because they select a small niche with few rivals. Advantages may be shorlived as rivals invade their market niche.

o The entry barriers tend to be low, there is little buyer loyalty, and competition becomes intense.o Marketing strategies and technologies employed by most rivals are largely non- proprietary, imitation is eas

o Over time, revenues fall, profit margins are squeezed, and only the strongest players survive the shakeout.- Too much focus to satisfy buyer needs.

o

May have too narrow a product or service.


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o

Many specialty ethnic and gourmet food stores may see their sales and profits shrink as large, nationalgrocers, such as Loblaw, expand their already broad product lines to include similar items. Given the

enormous purchasing power of the national chains, it would be difficult for such specialty retailers to attainparity on costs.

Combination Strategies: Integrating Overall Low Cost and Differentiation-

Primary benefit to be enjoyed by firms that successfully integrate low-cost and differentiation strategies is that it is

generally harder for competitors to duplicate or imitate.- An integrated strategy enables a firm to provide 2 types of value to customers: differentiated attributes(high quality

brand identification, reputation) and lower prices(because of the firms lower costs in value-creating activities).-

The goal becomes one of providing unique value to customers in an efficient manner.-

Superior quality can lead to lower costs because of less need for rework in manufacturing, fewer warranty claims, a

reduced need for customer service personnel to resolve customer complaints, and so forth.

3 Approaches to Combining Overall Low Cost and Differentiation

1. Automated and Flexible Manufacturing Systems:-

Many firms have been able to manufacture unique products in relatively small quantities at lower costs, a conceptknown as mass customization.

2. Exploiting the Profit Pool Concept for Competitive Advantage

- Profit poolcan be defined as the total profits in an industry at all points along the industrys value chain. -

Potential pool of profits deeper in some segments of the value chain than others, depths vary within individualsegments.

3. Coordinating the Extended Value Chain by Way of Information Technology

- Achieved success by integrating activities throughout the extended value chain and using information technology link their own value chain with the value chains of their customers and suppliers.

Potential Pitfalls- Failing to attain both strategies and ending up stuck in the middle.

o May become stuck in the middle if they try to attain both cost and differentiation advantages.- Underestimating the challenges/expenses associated with coordinating value-creating activities in the extended valu

chain:o

Successfully integrating activities across a firms value chain with the value chain of suppliers and customerinvolves a significant investment in financial and human resources.

- Miscalculating sources of revenue and profit pools in the firms industry.o May fail to accurately assess sources of revenue and profits in their value chain.

Could be as a result of managers bias may be due to his or her functional area background, work

experiences, and educational background.

Industry Life-Cycle Stages: Strategic Implications- Life cycle of an industry refers to the stages of introduction/growth/maturity/decline; occur over the life of an

industry.

- Life- cycle idea is clearly analogous to a living organism (birth-growth-maturity-death), the comparison does havelimitations.

-

Products/services go through many cycles of innovation and renewal. For the most part, only fad products have asingle life cycle. Maturity stages of an industry can be transformed or followed by a stage of rapid growth if

consumer tastes change, techno-logical innovations take place, or new developments occur in the generalenvironment.

Stages of the Industry Life Cycle


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Turnaround Strategies

- One problem with the life- cycle analogy is that we tend to think that decline is inevitably followed by death.- Decline can be reversed by strategies that lead to turnaround and rejuvenation. Such a need for turnaround may occu

at any stage in the life cycle. However, it is more likely to occur during the maturity or decline stage.

- Most successful turnarounds start with a careful analysis of the external and internal environments.o External analysisis identification of market segments or customer groups that may still find the product

attractive.o Internal analysispoints to opportunities for reduced costs and higher efficiency.

3 strategies to successfully turnaround:o

1:Asset and cost surgery.

Mature firms tend to have accumulated assets that do not produce any returns.

Outright sales or sale and leaseback of these assets free up considerable cash and improve

returns. Investment in new plants and equipment can be deferred.

Try to aggressively cut administrative expenses and inventories and speed up collection ofreceivables.

Outsourcing production of various inputs for which market prices may be cheaper than in- houseproduction.

o 2: Selective product and market pruning. Have many product lines that are marginally profitable or losing money.

The famous 80- 20 rule usually applies. Firm generally derives 80 percent of its profit from 20percent of its products clients, and markets.

Discontinue the unsuccessful product lines, cut off the unprofitable and usually difficult clients, andfocus all resources on a few core profitable areas.

o 3:Piecemeal productivity improvements. Improving business processes by re-engineering them, benchmarking specific activities against

industry leaders, encouraging employee input to identify excess costs, reducing R& D and marketingexpenses, increasing capacity utilization, and improving employee productivity lead to a significantoverall gain.

adms4900 3.0 - midterm notes student

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