Strategic Management Exam 2

-core strategy used to gain competitive advantage in specific product markets by exploiting core competencies

-PURPOSE: to create differences between a firm’s position and those of its competitors, and is a deliberate choice about how it will perform the value chain’s primary and support activities to create unique value.

-Focuses on a business’s relationships WITH ITS CUSTOMERS.

-Customers are the foundation of successful business-level strategies, so businesses must know relevant information about the customer base: who, what, and how.

- WHO will be served is determined by market segmentation, and dividing customers into groups based on needs.

-WHAT determines the needs the target customers have that the business-level strategy will satisfy.

-HOW determines how those needs will be satisfied and which core competencies will be used to do so.

1.    REACH – the firm’s access and connection to customers.

2.    RICHNESS – depth and detail of the 2-way flow of information between firm and customer. (the richer the flow, the better the firm knows customers)

3.    AFFILIATION – facilitates useful interactions with customers.

1.    BROAD – firms serving a broad market use their capabilities to create value on an industry-wide basis.

2.    NARROW/FOCUSED – firms intend to serve the needs of a specific segment or group of segments, to the exclusion of others. Could target based on age, geographic market, etc.

-when a firm produces goods/services with features that are acceptable to customers at the lowest cost, relative to competitors.

-requires innovations in processes that keep costs low and allow the firm to operate efficiently.

-example: ALDI

1. a loss of competitive advantage to newer technologies, and

2. a failure to detect changes in customers’ needs.

1. Can compete against rivals on price

2. Can price below rivals to interest buyers

3. Discourages new entrants that can’t endure low profit margins

-when a firm produces goods/services that customers perceive as being different from competitors in ways that are important to them.

-if a product is perceived as providing superior value, customers are willing to pay more, or a “premium”

-example: Apple

1. a customer group’s decision that the unique features provided by the differentiated product over the cost leader’s goods or services are no longer worth a premium price, and

2. the inability of a differentiated product to create the type of value for which customers are willing to pay a premium price,

- special products for a certain kind of person.

- example: Tesla caters not only to car-lovers, but individuals who value sustainability and electric vehicles. People are willing to pay more for this because they perceive it is providing superior value.

1. Competitors might “out-focus” your firm and successfully serve an even more narrow market, and

2. The needs of customers within a specific market segment may become too similar to the needs of customers across the entire industry, defeating the purpose of a narrow focus.

1. Customers are loyal to firms (over rivals) offering differentiated products

2. Uniqueness reduces sensitivity of buyers to price increases

3. Customer loyalty to differentiated products deters new entrants

-when a firm produces low-cost goods/services for a particular segment.

-example: IKEA targets young buyers who desire stylish home furnishing at a low cost.

-when a firm offers both differentiated and low-cost products/services

-Samsung, for example, offers differentiated products (e.g. the smart-flip phones) but at a low(er) cost.

1. may become stuck in the middle (JC Penney), meaning the cost structure isn’t low enough to be attractive, nor are the products sufficiently differentiated to create value, and

2. firms may need to form alliances with other companies to achieve differentiation, yet alliance partners may extract prices for the use of their resources that make it difficult to meaningfully reduce costs.

Flexibility in manufacturing systems and improvements and interconnectedness in information systems within and between firms (buyers and suppliers) is necessary for this strategy to be effective.

Market commonality & Resource similarity are influenced by the drivers of competition:

1. Awareness - the extend to which firms recognize the degree of their mutual interdependence (the less aware, the more competitive)

2. Motivation - the firm’s incentive to take action or to respond to a competitor’s attack, relates to perceived gains and losses

3. Ability - each firm’s resources and the flexibility they provide (without resources or flexibility, firms are unable to attack competitors)

-First movers are companies who are the first to enter a new market or introduce a new product or service. They have advantages like establishing brand recognition, capturing market share, and setting industry standards. BUT they face risks like high initial costs, uncertainty about market demand, and the potential for competitors to learn from their mistakes.

-must emphasize research and development as a path to innovative goods and services that customers value.

-must be aggressive and willing to experiment with innovation

-first movers tend to have higher survival rates than second or late movers

1.    Can rapidly develop tech.

2.    earn above average returns.

3.    earns the loyalty of customers who become committed to the goods or services of the firm that first made them available.

4.    market share that can be difficult for competitors to take during future competitive rivalry.

- In markets that change slowly, companies can keep their advantages for a while and focus on protecting and extending them.

-example: the car industry … customer purchases are bigger and infrequent, and innovation is expensive and takes much longer to research and develop.

- In fast-changing markets, competition is intense as companies focus on short-term advantages that can be easily copied.

-example: the fashion industry. trends begin and end very quickly, fast-fashion stores like H&M, Zara, etc rapidly copy one another, and consumer purchases happen frequently.

- standard markets have moderate competition where companies try to maintain sustainable advantages and focus on innovation.

-example: the smartphone industry. research and development is expensive, but less so than in the auto industry, customer purchases happen semi-frequently. think a new iPhone being put out every year/new iOS updates.

-plan that specifies which actions a firm takes to gain a competitive advantage by selecting & managing a group of different businesses competing in different product markets.

-Purpose: help companies to select new strategic positions that will increase the firm’s value.

-concerned with the business’s relationships with other businesses, rather than customers.

1.    what product markets and businesses the firm should compete.

2.    and how corporate headquarters should manage those businesses.

when a company expands its business by acquiring or merging with competitors that operate at the same stage of the production process or provide similar products or services.

when a company expands its business into different stages of the production process or value chain. This means controlling multiple stages of the supply chain from raw materials to distribution and retail.

1.    A single-business diversification strategy is a corporate-level strategy wherein the firm generates 95 percent or more of its sales revenue from its core business area.

2.    A dominant-business diversification strategy is when the firm generates between 70 and 95 percent of its total revenue within a single business area.

1.    A related constrained diversification strategy is when the links between the diversified firm’s businesses are direct, meaning they use similar sourcing, throughput, and outbound processes.

2.    A related linked diversification strategy is a diversified company with a portfolio of businesses that have only a few links between them.

1.    An unrelated diversification strategy is a highly diversified firm that has no relationships between its businesses.

example: General Electric is in appliances, healthcare, aerospace&aviation, etc

1. Value-creating diversification – to create economies of scope, increase market power, or create financial economies thru more efficient capital allocation and the ability to transfer core competencies.

   • enhances company’s overall value proposition and generates positive returns for shareholders by exploiting existing resources/capabilities

2. Value-neutral diversification – done bc of anti-trust regulations, low performance, risk reduction, or uncertainty abt future cash flows.

   • neither significantly increase nor decrease the overall value of the company.

3. Value-reducing diversification – to reduce managerial risk or increase managerial compensation.

   • when a company's diversification efforts result in a decrease in its overall value.

the cost advantages that a firm can achieve by producing a variety of goods or services rather than specializing in the production of just one. In other words, it's the reduction in average costs per unit that arises from producing a wide range of goods or services.

Companies create value when using a related diversification strategy by

1. building on/extending resources and capabilities between businesses in the portfolio to build a competitive advantage, and

2. by using economies of scope.

Mergers and acquisitions are popular strategies for companies worldwide because they aim to create value and surpass competitors. Globalization and deregulation in various industries across many economies have contributed to this popularity among both big and small firms.

-Increase market power.

-Overcome entry barriers to new markets or regions.

-Avoid the costs of developing new products and increase the speed of new market entries.

-Reduce the risk of entering a new business.

- Become more diversified.

-Reshape their competitive scope by developing a different portfolio of businesses.

-Enhance their learning as the foundation for developing new capabilities.

1.    The difficulty of effectively integrating the firms involved.

2.    Incorrectly evaluating the target firm’s value.

3.    Creating debt loads that preclude adequate long-term investments (R&D)

4.    Overestimating the potential for synergy.

5.    Creating a firm that is too diversified.

6.    Creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition.

7.    Developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls.

-The acquiring and target firms have complementary resources that are the foundation for developing new capabilities.

-The acquisition is friendly, thereby facilitating integration of the firms’ resources.

-The target firm is selected and purchased on the basis of completing a thorough due-diligence process.

-The acquiring and target firms have considerable slack in the form of cash or debt capacity.

-The newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some of the acquiring firm’s poorly performing units.

-The acquiring and acquired firms have experience in terms of adapting to change.

- Research, development, and innovation are emphasized in the new firm.

1.    Horizontal Acquisitions

2.    Vertical Acquisitions

3.    Related Acquisitions

the acquisition of a company competing in the same industry as the acquiring firm, which increases a firm’s market power by exploiting cost-based and revenue-based synergies.

Example: if Google purchased another search engine, like Bing.

a firm acquiring a supplier or distributor of one or more of its products. The newly formed firm controls additional parts of the value chain, which leads to increased market power.

Example: if Ford purchased a tire manufacturing company.

acquiring a firm in a highly related industry, where firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities.

Example: Google purchasing YouTube, expanding into the online video platform

The outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process, which makes it less risky.

The risk of relying on acquisitions for new product development is that it becomes a substitute for internal innovation, leaving firm reliant on the acquired firm for success.

1. gaining access to needed and potentially scarce resources

2. increased pressure to integrate operations on a global scale

3. technology

4. the potential of large demand for goods and services from people in emerging markets such as China and India.

- raw material- especially minerals and energy- are critical to firms’ efforts in some industries to manufacture their products. Energy and mining companies have access to the raw materials, through their worldwide operations, which they in turn sell to manufacturers requiring those resources.

-labor- In other industries where labor costs make up a significant portion of a company’s expenses, firms may choose to establish facilities in other countries to gain access to less expensive labor. example: sweatshops.

-As countries industrialize, the demand for certain products and commodities seems to become more alike. This could be because lifestyles in developed nations are becoming more similar.

-Improved global communications make it easier for people from different countries to imagine and understand lifestyles in other cultures.

-The rapid adoption of internet and mobile apps allows for better blending of trade, capital, culture, and labor. So, technology forms the basis for connecting different markets and operations globally. International strategies also help companies use technology to organize their operations seamlessly.

offers opportunities for substantial revenue growth, diversification of market risks, and access to valuable resources and knowledge, which improves their competitive position in the global marketplace.

1. Increased market size

2. Increased economies of scale and learning

3. Development of a competitive advantage through location

-increases a firm's market size by allowing them to establish stronger positions in markets beyond their domestic one.

-particularly effective when growth opportunities in a firm’s domestic market are limited!

-increases a firm’s economies of scale by allowing them to compete in more markets, especially in manufacturing.

-a broader reach enables continual process improvements, which reduces costs while enhancing product value.

-operating in multiple international markets offers new learning opportunities, including in research and development (R&D), which fosters innovation, and is important for short- AND long-term success.

-locating facilities outside the domestic market can help firms reduce costs, because sometimes international facilities offer access to lower-cost labor, energy, and other resources.

-being situated in strategic locations provides other benefits: access to critical supplies and broader customer base.

-effective facility management is crucial to reap full benefits of the location!

1. Multi-domestic strategy

2. Global strategy

3. Transnational Strategy

-companies adapt their products or services to suit the preferences and needs of each local market.

-Each country or region operates independently, tailoring its offerings accordingly.

-Think of it as a "think local, act local" strategy.

Advantages: expands the firm’s local market share because the firm can pay attention to the local clientele’s needs

Disadvantages: results in less knowledge sharing for the corporation as a whole because of the differences across markets, decentralization, and the different international business-level strategies employed by local units, AND doesn’t allow the development of economies of scale which makes it cost way more.

-involves offering standardized products or services across all markets.

-Companies maintain a uniform brand image and consistent marketing, aiming for economies of scale and cost efficiency.

Advantages: Offers good opportunities to take innovations developed at the corporate-level, or in one market, and apply them in other markets. Also inexpensive.

Disadvantages: only works if differences between markets and the customers the firm is serving are insignificant.

-combines elements of both multidomestic and global strategies.

-Companies seek to achieve global efficiency while also being responsive to local market differences.

-balances standardization with customization, by sharing resources and knowledge across borders.

Advantages: can produce higher performance than implementing either the multi-domestic or global strategies if the circumstances are right

Disadvantages: difficult to use because of conflicting goals

1. Exports (sending products produced in domestic markets over to international markets)

2. Licenses (agreement that allows foreign company to manufacture+sell their products in host country)

3. Strategic alliances (finds firms collaborating with others to help them get into more than one international market easily)

4. Acquisition (acquire stake/purchase a firm in another country)

5. Greenfield venture (either investing in or establishing entirely new subsidiary in foreign market)