1

EDHEC at Nice M1 FE 2013/2014 Strategic Management Part 1 Themes & Sub-themes

BASIC NOTIONS
Value/wealth creation (definition of economic value); what are the ways in which value is created?

Economic value: market price, the amount of money that people are willing to pay for the product (willingness to
pay).

Value can be created in 2 ways: by commerce or by production.
Production

creates value by physically transforming products that are less valued by consumers into
products that are more valued by consumers.
Commerce

creates value by repositioning products in space and time.(the essence of commerce is creating
value through arbitrage across time and place)

What is value added (where does it come from) and how is it paid out (where in what form and to whom
does it go)?

Value added:
the difference between the selling price of a flow of output and the costs of purchased inputs used in making it.
the difference in value of firms output and the cost of its material inputs:
Value added = sales revenue from output - cost of materials inputs
The value created by the activity of the firm must go somewherethe sum of all the income paid to the
suppliers of factors of production:
Value added = wages/salaries + interest + rent + royalties/license fees+taxes + dividends + retained profits

Productivity (technical and economic).

Productivity: the number of units of output produced per unit of input.

Total Factor Productivity: the ratio of outputs to all types of input resources.
Usually measured with respect to only certain input resources: laboroutput per man-hour

Break-even point of a project; fixed costs variable costs; graphical / mathematical representation (of an
investment project, and of an on-going economic activity).

Break-even analysis: a method for determining the additional sales that must be generated by an investment to
leave the company at least as profitable as it would have been without the investment.

Break-even point: the point where total revenue received equals total costs associated with the sale of the product.
Four aspects of an investment: fixed costs, variable costs, price, unit sales

unit per costs variable - price
costs fixed
units even - break

unit per cost variable - price
/day month/week per costs operating
/day month/week per units even - break

From economic logic to financial logic

Economic logic:
Economic viability: creation of wealth; break-even point; possible sales volume.
Generating profit: repay firms debt; reinvest into the production activity; return to investors as dividend.
2

Financial logic:
Recycling profits generated by profitable economic activity;
Providing financial resources for development of further economic activity

Efficiency versus effectiveness; definition of each concept; relative importance of each.

Efficiency: doing things right. MEANS: pursuing ones objectives with the minimum of waste of resources.

Effectiveness: doing the right things. ENDS: choosing and achieving the right objectives.

Layers of the business environment (conceptual map); direct-action environment versus indirect-action
environment of the firm

Direct-action environment: industry/sector & competitors.

Indirect-action environment: the macro-environment.

THE CONCEPT OF STRATEGY
Grants four key characteristics of an effective strategy; the notion of strategic fit; distinguishing strategy
from tactics

Four key characteristics of an effective strategy:
clear, consistent & long-term goals;
profound understanding of the competitive environment;
objective appraisal of resources;
effective implementation.







Strategic fit: the consistency of firms strategy with
a. The firms external environment;
b. The firms internal environment(goals, values, resources, capabilities)



Strategy: the overall plan to deploy resources to establish a favorable position.(winning the war)
Important;
Considerable amount of resources required;
Hardly irreversible.
Tactic: a scheme for a specific action.(winning battles)

Sources of superior profitability (where to compete and how to compete); distinguishing business strategy from
corporate strategy (business versus corporate in the study and practice of strategy)
Strategy as design strategy as process; intended versus emergent strategy

Corporate strategy: the scope of the firm in terms of the industries and markets in which it competes(where to
compete)
Business strategy: how the firm competes within a particular industry or market(how to compete).

GOALS, VALUES, AND PERFORMANCE
Stakeholder versus shareholder approach to (or perception of) the firm
3

Stakeholder approach: the firm is a coalition of interest groups - it seeks to balance their different objectives.

Shareholder approach: the firm exists to maximize the wealth of its owners = maximize the present value of
profits over the life of the firm.

Accounting profit (normal return to capital) versus economic profit; advantages of the latter as a performance
measure

Accounting profit: the normal return to capital(rewards investors for the use of their capital) + economic profit

Economic profit: the surplus available after all inputs(including capital) have been paid for.
As a preferred measure:
1It sets more demanding performance discipline for managers;
2It improves the allocation of capital between different business of the firm by taking account of the
real costs of more capita-intensive business.

Steps in the [enterprise] value-maximization approach to strategy formulation; the three problems with this
approach

Steps:
Identifying strategy alternatives;
Estimate cash flows associated with each strategy;
Estimate cost of capital for each strategy;
Select the strategy that generates the highest NPV.

Problems:
Estimating cash flows beyond 2-3 years is difficult;
Choosing strategy does not predetermine cash flows(strategy as a direction and a set of guidelines);
Value of firm depends on option value as well as DCF value.

Bases of forward-looking, and of backward-looking, approaches to appraising the firms performance; three
sorts of benchmark against which the firms profitability (and other performance) can be compared

Forward-looking: stock market value
Backward-looking: accounting ratios
Three sorts of benchmarks: comparisons over time; interfirm comparisons; cost of capital.
Disaggregation of return on invested capital (ROCE) as an approach to performance diagnosis; what this
approach reveals, and what it does not reveal, about the firms performance.












It identifies the the fundamental value drivers. It does not reveal the sources of differences.

How can past performance serve as a guide to selecting strategies; whats the danger in using this guide?

If we can establish why a company has been performing so badly then we have a basis for corrective
actions(strategic & operational); for companies that are performing well, financial analysis allows us to
4
understand the sources of superior performance so that strategy can protect and enhances these
determinants of success.
However, the world of business is one of constant change and the role of strategy is to help the firm adapt to
the change. The challenge is to look into the future and identify factors that threaten performance or create
new opportunities for profit. While financial analysis is inevitably backward-looking, strategic analysis
allows us to look forward and understand some of the critical factors impacting a firms success in the future.

Three requirements of performance targets for them to be effective; how, in general, does the nature of
performance targets change as one moves from the CEO level to the department/team level of the firm?

Three requirements of performance targets:
Consistent with long-term goals;
Linked to strategy;
Relevant to the tasks and responsibilities of individual organizational members.

Broad corporate goals need to be translated into specific objectives that meaning to managers further down
the organization. The key is to establish performance targets that match the variables over which different
managers exert influence.

For what two reasons, according to Grant, does the pursuit of profit so often fail to realize its goal?

First, profit goals will only guide effective management action if managers know what determines profit.
Obsession with profitability and shareholder return can blinker managers perception of the real drivers of
superior performance.
Secondly, there is also the danger that whenever broad, long-term goals are translated into time-specific
performance metrics the performance targets become divorced from the ultimate objective.

What is an option? Growth options versus flexibility options?
How, and why, does option value vary with uncertainty (volatility), duration (time to expiry), and dividends

Option: the choice of whether to do something or not.
Growth options: allow a firm to make small initial investments in a number of future business opportunities but
without committing to them.(small investments to create opportunities for bigger investments)
Flexibility options: relate to the design of projects and plants that permit adaptation to different circumstances.

Option value rises with greater volatility, more time, higher project value, higher interest rates.

INDUSTRY ANALYSIS: THE FUNDAMENTALS
How does the macro environment impact on the firm? What are the four variables of the classic, macro-
environment analytical framework?

The macro environment impacts the firm through its effect on the industry environment; the industry
environment lies at the core of the macro environment.

PEST/PESTEL analysis


What three factors determine the profits earned by the firms in a given industry?

Three key influences:
The value of products to customers;
The intensity of competition;
Relative bargaining power at different stages of the [external] value chain.
5
How does the overall strength of the five competitive forces in Porters 5F model affect industry profitability
(attractiveness)? Why, within the logic of the 5F model, can government/the state not constitute a 6
th
force?
Identify factors determining the strength of each of the five competitive forces in the 5F model.
Explain the causal relationship between each factor and the competitive force in question.

Porters Five Forces of Competition:
Competition from Substitutes:
Buyers propensity to substitute;
Relative prices and performances of substitutes.
Threat of Entry:
Capital requirements;
Economies of scale;
Absolute cost;
Product differentiation;
Access to channels of distribution;
Governmental and legal barriers;
Retaliation;
The effectiveness of barriers to entry.
Rivalry between Established Competitors:
Concentration;
Diversity of competitors;
Product differentiation;
Excess capacity and exit barriers;
Cost conditions: scale economies & the ratio of fixed to variable costs.
Bargaining Power of Buyers:
Bargaining Power of Suppliers:
Price sensitivity(cost of product to total cost; product differentiation; competition)
Relative bargaining power(size & concentration; switching costs; information; ability to backward integrate)

Definitions of the following concepts: concentration, product differentiation, entry and exit barriers, switching
costs, vertical integration (forward backward);

Concentration(seller concentration): the number and size distribution of firms competing within a market.

Product differentiation: the process of distinguishing a product or service from others, to make it more attractive
to a particular target market.

Entry barriers: obstacles that make it difficult to enter a given market. Because barriers to entry protect
incumbent firms and restrict competition in a market, they can contribute to distortionary prices. The existence of
monopoliesor market power is often aided by barriers to entry.

Exit barriers: obstacles in the path of a firm which wants to leave a given market or industrial sector. These
obstacles often cost the firm financially to leave the market and may prohibit it doing so. If the barriers of exit are
significant; a firm may be forced to continue competing in a market, as the costs of leaving may be higher than
those incurred if they continue competing in the market.

Switching costs: The negative costs that a consumer incurs as a result of changing suppliers, brands or products.

Vertical integration: When a company expands its business into areas that are at different points on the same
production path, such as when a manufacturer owns its supplier and/or distributor. Forward integration focuses
on the manner in which a company oversees its production distribution. Backward integration concentrates on
how a company regulates its goods or suppliers.

how, a priori, can five-forces analysis be used to forecast industry profitability?

It can used to analyze the industry structure. If we can forecast changes in industry structure we can predict
likely impact on competition and profitability(forecasting industry profitability). Once we know which
structural features of the industry support profitability, we can choose a favorable positioning within the
industry(strategic planning).

6
Define key success factors (ksf); define, and explain in detail, the two prerequisites for success underlying the
evaluation of the key success factors faced by a firm; what makes a success factor truly key?

Key Success Factors: factors within the industry environment that influence a firms ability to outperform its rivals.

Two pre-requisites for success:
What do customers want?(analysis of demand)
Who are customers?
What do they what?
How do they choose between competing offers?
How does the firm survive the competition?(analysis of competition)
What drives competition?
What are the main dimensions of competition?
How intense is the competition?
How can we obtain a superior competitive position?




FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS
What is meant by complementarity between products? How can a firm on one side of a complementary
relationship profit more from the situation than a firm on the opposite side?

Compliments(complimentary products) have the opposite effect to substitute. While substitutes reduce the
value of an industrys product, complements increase it. Where products are close compliments, they have
little or no value in isolation: consumers value the whole system.

Where two products complement one another, profit will accrue to the supplier that builds the stronger
market position and reduces the value contributed by the other. The key is to achieve monopolization,
differentiation, and the shortage of supply in ones own product, while encouraging competition,
commoditization, the excess capacity in the production of the complementary product.

What argument does Porter make against treating complements (complementary products) as a 6
th
competitive
force?

Porter considers that complimentary products do not constitute a competitive force because the presence of
strong complements is not necessarily bad (or good) for industry rivalry. Complements can factor into
industry rivalry either positively (as when they raise switching costs) or negatively (as when they neutralize
product differentiation).

What impact does the intensity of competitive dynamics have on industry structure, and why?

Porter framework assumes:
1) Industry structure drives competitive behavior;
2) Industry structure is (fairly) stable.

But dynamic competition can also change industry structure:
Schumepterian Competition(creative destruction): market-dominating incumbents are challenged,
and often unseated, by rivals that deploy innovatory products and innovatory strategies;
Hypercompetition: intense and rapid competition moves, in which competitors must move quickly
to build new advantages and erode the advantages of their rivals. The only route to sustained superior
performance is through continuously recreating and renewing competitive advantages.
The issue is the speed of structural change in the industry.



7
Two valuable contributions of game theory to strategic management;
the meaning and importance of the following key game-theory concepts: cooperation, deterrence,
commitment, signalling;
problems or limitations of game theory as a basis of strategic theory;

Two valuable contributions:
1) It permits the framing of strategic decisions as interactions between competitors;
2) It can predict outcomes of competitive situations involving a few, evenly-matched players.

Cooperation: game theory can show situations in which cooperation is more advantageous than competition.

Deterrence: changing the payoffs in the game in order to deter a competitor from certain actions.

Commitment: irrevocable deployments of resources that give credibility to threats.

Signalling: the selective communication of information to competitors (or customers) designed to influence their
perceptions and hence provoke or suppress certain types of reaction.

Problems of Game Theory:
Useful in explaining past competitive behavior, weak in predicting future behavior;
Lack of an integrated general theory - many different models; outcomes highly sensitive to small
changes in assumptions.
Segmentation: definition, strategic importance, bases, stages in segmentation analysis, vertical segmentation
and profit pools

Segmentation: the process of disaggregating industries into specific markets.

Base:
Initially, it may be convenient to define industries broadly, but for a more detailed analysis of competition
we need to focus on markets that are drawn more narrowly in terms of both products and geography.

Importance:
Segmentation is particularly important if competition varies across the different submarkets within an
industry such that some are more attractive than others.

Stages:
1Identify key segmentation variables;
2Construct a segmentation matrix;
3Analyze segment attractiveness;
4Identify the segments Key Success Factors(KSFs);
5Select segment scope(broad or narrow).

Vertical segmentation: segment an industry vertically by identifying different value chain activities.

Profit pools: the total profits earned at all points along thevalue chain of an industry.

Strategic group: definition; different strategic dimensions as basis of strategic-group analysis

Strategic group: a group of firms in an industry following the same of similar strategies along the strategic
dimensions.

Strategic dimensions might include product range, geographical breadth, choice of distribution channels,
level of product quality, degree of vertical integration, choice of technology, and so on. By selecting the most
important strategic dimensions and locating each firm in the industry along them, it is possible to identify
groups of companies that have adopted more or less similar approaches to competing within the industry.

TUTORIAL 1
PORTER, Michael E. "What Is Strategy?" Harvard Business Review. 74(6) (November-December 1996) 61-78.
Definition of key terms: operational effectiveness; strategic positioning; productivity frontier; competitive
8
convergence (mutually destructive competition); the meaning of competitive strategy.
Operational effectiveness: performing similar activities better than rivals perform them.

Strategic positioning: performing different activities from rivals or performing similar activities in different
ways.

Productivity frontier: the sum of all existing best practices at any given time or the maximum value that a
company can create at a given cost, using the best available technologies, skills, management techniques, and
purchased inputs. Thus, when a company improves its operational effectiveness, it moves toward the frontier.

Competitive convergence: Situation in which competition among suppliers of a productis so intense that there
is little or no differentiation left on the basis of which a buyer may choose one supplier over the other.

Competitive strategy: how a company can gain a competitive advantage through a distinctive way of
competing. Competitive strategies are essential to companiescompeting in markets that are heavily saturated
with alternatives for consumers.

Three sources of strategic positions.

Variety-based positioning: produce a subset of an industrys products or services; based on the choice
of products or services.
Needs-based positioning: serves most or all of the needs of a particular group of customers; based on
targeting a segment of customers.
Access-based positioning: segmenting customers who are accessible in different ways.

Importance to sustainable advantage of trade-offs between activities; three reasons why trade-offs arise.

According to Porter, a sustainable advantage cannot be guaranteed by simply choosing a unique position,
as competitors will imitate a valuable position in one of the two following ways:
1. A competitor can choose to reposition itself to match the superior performer.
2. A competitor can seek to match the benefits of a successful position while
maintaining its existing position (known as straddling

).
Trade-offs occur when activities are incompatible and arise for three reasons:
1. A company known for delivering one kind of value may lack credibility and
confuse customers or undermine its own reputation by delivering another kind of
value or attempting to deliver two inconsistent things at the same time.
2. Trade-offs arise from activities themselves. Different positions require different
product configurations, different equipment, different employee behavior, different
skills, and different management systems. In general, value is destroyed if an
activity is over designed or under designed.
3. Trade-offs arise from limits on internal coordination and control. By choosing to
compete in one way and not the other, management is making its organizational
priorities clear. In contrast, companies that try to be all things to all customers,
often risk confusion amongst its employees, who then attempt to make day-to-day
operating decisions without a clear framework.

What is meant by the activity system? What is meant by strategic fit among activities, and why is such
fit essential to the sustainability of competitive advantage?










9
HAMBRICK, Donald C. and James W. FREDRICKSON, "Are You Sure You Have a Strategy?" Academy of
Management Executive. 15(4), (November 2001) 48-59.
Strategy as correctly defined by H & F; importance of strategy (its definition) for subordinate managers
Five elements of the firms strategy ( la H & F).
Notion (examples) of mutual reinforcement between H & Fs elements of strategy.
Strategic comprehensiveness (order in which strategic decisions should be made).























ANALYZING RESOURCES AND CAPABILITIES
Rationale for the resource-based approach to strategy; distinction between resources and capabilities

When the industry environment is volatile, internal resources and capabilities offer a more stable basis
for strategy than an industry or market focus.
Resources and capabilities are the primary sources of profitability.

Resources: the productive assets owned by the firm.
Capabilities: what the firms can do; the essence of superior performance.
Individual resources do not confer competitive advantages, they must work together to create organizational
capabilities.

Resources (categories & subcategories) underlying organizational capabilities; examples of indicators for each
specific type of resource; figure showing links among resources, capabilities, and competitive advantage.

Tangible resources: financial resources and physical assets that are valued in the firms balance sheet.

Intangible resources: R&D, reputational resources(brand names, trademarks), intellectual property(patents,
copyrights, trade secrets, trademarks comprises technological and artistic resources, technical know-how)

Human resources: the skills and productive effort offered by an organizations employees.







10
Two ways in which additional value can be created from tangible resources

What opportunities exist for economizing on their use? Can we use fewer resources to support the
same level of business or use the existing resources to support a larger volume of business?
Can existing resources be deployed more profitability?

Intangible assets market-to-book ratios

The exclusions and undervaluation of intangible resources is a major reason for the large and growing
divergence between companies balance sheet valuations (or book values) and their stock-market valuations.

Means of exploiting the profit potential of intangible assets (for example, means of exploiting brand value, or
brand equity)

Exploiting the profit potential of intangible assets typically involves extending the range of products over
which they are exploited. (NIKE, DOLBY)

Human resources: skills effort; how organizational culture impacts on the latter.

The ability of employees to harmonize their efforts and integrate their separate skills depends not only on
their interpersonal skills but also on the organizational context. This organizational context as it affects
internal collaboration is determined by a intangible resource: the culture of organization.

Definitions: Organizational capabilities, core competences, organizational routines

Organizational capabilities: a firms capacity to deploy resources for a desired end result.

Core competences: capabilities fundamental to a firms strategy and perform as they make a disproportionate
contribution to ultimate customer value or to the efficiency with which that value is delivered; as they provide a
basis for entering a new market.

Organizational routines: regular and predictable behavioral patterns comprising repetitive patterns of activity.

Functional-analysis approach to classifying organizational capabilities examples of different organizational
functions, and of one or more specific capabilities located within each function




















11
Value-chain-analysis approach: Porters value chain (as an approach classifying organizational capabilities);
primary versus support activities; description/definition of each of the 5 + 4 activities; examples of links
between the firms value chain and its buyers value chain

Value-chain-analysis approach: identifies a sequential chain of the main activities that the firm undertakes.

Primary activities: directly concerned with the creation or delivery of a product or a service.
Inbound logistics: activities concerned with receiving, storing and distributing the inputs to the product
or service;
Operations: transform these inputs into the final product or service;
Outbound logistics: collect, store and distribute the product to customers.
Marketing and sales: provide the means whereby consumers/users are made aware of the product or
service and are able to purchase it;
Service: includes all those activities which enhance or maintain the value of a product or service.

Support activities: help to improve the effectiveness or efficiency of primary activities.
1Procurement: the process of acquiring the various resource inputs to the primary activities;
2Technology development: concerned directly with product, or with process, or with a particular resource;
3Human resource management: activities involved in recruiting, managing, training, developing and
rewarding people within the organization;
4Infrastructure: the systems of planning, finance, quality control, information management, etc.







































12
Managerial actions necessary for the integration of resources to create organizational capabilities

Routines and Integration: capabilities are based upon routinized behavior. Routinization is an essential step in
creating organizational capability -- only when the activities of organizational members become routine can tasks
be completed efficiently and reliably.
Bringing the relevant resources within an organizational unit;
Designing processes;
Creating motivation;
Aligning the activity within the over strategy of the organization.

Three broad factors determining the profit-earning (rent-earning) potential of a resource or capability;

factors determining the extent of the competitive advantage established;

Scarcity: if a resource or capability is widely available within the industry, it may be necessary in order to compete
but it will not be a sufficient basis for competitive advantage.
Relevance: a resource or capability must be relevant to the KSFs in the market.

factors determining the sustainability of the competitive advantage (sources of non-transferrability, or
immobility);

Durability: the more durable a resource, the greater its ability to support a competitive advantage over the long
term.

Transferability: if resources and capabilities are transferable (bought and sold), then any competitive advantage
that based upon them will be eroded as competitive advantage is undermined by competitive imitation.

Replicability: capabilities based upon complex organizational routines are less easy to copy.

factors determining the appropriability of the competitive advantage

Property rights; relative bargaining power; embeddedness.

External (outside) focus versus internal (inside) view in identifying resources and capabilities(R&C);
benchmarking (as a step in appraising R & C) and the criteria in terms of which appraisal is undertaken; two
approaches to developing the strategic implications of R&C analysis

13
ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS: THE FUNDAMENTALS OF STRATEGY
IMPLEMENTATION.
Functional structure of a firm versus divisional (or multidivisional) structure; specialization as the basis of
organizational structure and the need for integration of specialized efforts

Functional structure works best for organizations that only produce a few products. One of its main advantages is
that employees within functional departments are highly specialized and thus are very skilled and knowledgeable.
Another advantage is that with functional structure, it's easy to accomplish functional goals specific to certain
departments.
There are two main weaknesses in the functional organizational structure: it responds very slowly to change, and it
may take too long for decisions to be made because of the hierarchy of various managers. Among other weaknesses
is the lack of coordination between departments and lack of innovation.

The main strength of the divisional structure is that it is very adaptable to fast changes and to differences between
products, geographic locations or customers. Also, it involves collaboration between various functions, which leads
to innovation.The lack of specialization, along with integration and standardization difficulties, are the primary
disadvantages of the divisional structure.

Specialization as basis: firm exists because of their efficiency advantages in producing goods and services. The
fundamental source of efficiency is specialization through the division of labor into separate tasks.

The cooperation problem versus the coordination problem; the agency problem

Cooperation problem(agency problem):A conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. The problem is that the agent who is supposed to make the decisions that
would best serve the principal is naturally motivated by self-interest, and the agent's own best interests may differ
from the principal's best interests.

Coordination problem: the problem associated with making diverse efforts mesh together seamlessly to achieve
the expected result.

Mechanisms (organizational solutions) for achieving goal alignment; and for achieving coordination

Goal alignment:
Control mechanism(hierarchical supervision);
Performance incentives(rewards to output);
Share values.

Coordination:
Rules and directives;
Routines;
Mutual adjustment.

Advantages of hierarchical structures in coordinating; mechanistic versus organic organizational forms

Economizing on coordination
Adaptability(loose-coupled, modular hierarchy)






14
Four bases for defining organizational units; intensity of coordination as choice criterion between latter bases

1. Common tasks;maintenance service
2. Products; software designing
3. Location; Starbucks stores
4. Process. assembly line

Intensity of coordination needs: those who need to interact most closely should be located within the same
organizational unit.

Fundamental flaw in all matrix structures; practical solution to that problem

The problem is when this multidimensional structural is over-formalized, resulting in a top-heavy corporate
HQ and over-complex systems that slow decision-making and dull entrepreneurial initiative.
The trend has been for companies to focus formal systems of coordination and control on one dimension,
them allowing the other dimensions of coordination to be mainly informal.

Alternative organizational forms (emerging organizational phenomena):
Delayering;
adhocracies and team-based organizations;
project-based organizations;
network structures;
permeable organizational boundaries
their common characteristics

A focus on coordination rather than on control;
Reliance on informal coordiantion where mutual adjustment replaces rules and directives;
Individuals in multiple organizational rules.

SOURCES AND DIMENSIONS OF COMPETITIVE ADVANTAGE

Basic definition of competitive advantage (C.A.); how does C.A. emerge?

Competitive advantage: An advantage that a firm has over its competitors, allowing it to generate greater sales or
margins and/or retain more customers than its competition.

External sources of change: which have differential effects on companies because of their different resources and
capabilities or strategic positioning.

Changing customer demand

Changing price

Technological chang

Internal sources of change: through innovation

which creates competitive advantages for the innovator while

undermining the competitive advantages of the incumbents -- creative destruction.

Two capabilities required in order to ensure responsiveness to external change.

The ability to anticipate changes in the external environment
Speed.



15
Strategic innovation (internally-generated change): definition; dimensions of innovatory strategies.

Strategic innovation: new approaches to doing business, including new business models.

Dimensions:
New industries (blue

ocean strategy:

the creation of uncontested market space)

New customers segments
New sources of competitive advantages(new game strategy

: reconfiguring the industry value chain in order

to play change the rules of the game)

Imitation or innovation as processes which undermine C.A., requirements for imitation and types of isolating
mechanisms, barriers to imitation created by first-mover advantage.

The speed with which competitive advantage is undermined depends on the ability of competitors to
challenge either by imitation or innovation. Imitation is the more direct form of competition.

Requirement for Imitation Isolating Mechanism(barriers to imitation)
Identification Obscure superior performance
Incentives for Imitation
Deterrence
Preemption
Diagnosis
Causal ambiguity
Uncertain imitability
Resources Acquisition
Immobility
Irreplicability

Causal ambiguity: when a firms competitive advantage is multidimensional and is based on complex
bundles of resources and capabilities, it is difficult for rivals to diagnose the success of the leading firm. Its
outcome is uncertain imitability: if the causes of a firms success cannot be known for sure, success is
uncertain,

Perfect versus imperfect competition possibility of [sustainable] competitive advantage





Sources of competitive advantage; Porters generic strategies

Cost advantage: supply an identical product or service at a lower cost. (cost leader)
Differentiation advantage: supply a product or service that is differentiated in such a way that the customer is
willing to pay a price premium that exceeds the additional cost of the differentiation.





Law of Experience underlying the experience curve; three bases of experience; relationship between
experience and market share; experience and the possibility of penetration pricing






16
The unit cost of value added for a standard product declines by a constant proportion each time cumulative
output doubles.

Sources of experience effect:
1) Economies of scale;
2) Learning by doing;
3) Replacing labor with capital(i.e. with machines)

Penetration pricing: the practice of offering a low price for a new product or service during its initial offering in
order to attract customers away from competitors. Law of experience suggests this practice is possible since the
cost will be reduced by the accumulation of experience.

Economies of scale: definition; three principal sources; limits to scale economies (how sme offset the
disadvantages of their small scale)

Economies of scale: the cost advantages that enterprises obtain due to size, throughput, or scale of operation, with
cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of
output.
Technical input-output relationships;
Indivisibilities;
Specialization.

The essence of economies of scale is volume. Small & medium enterprises offset this problem by:
1) Exploiting flexibility;
2) Outsourcing activities where scale is critical to efficiency;
3) Avoiding motivational and coordination problems that often afflict large organizations.

Economies of learning: levels at which learning occurs and nature of learning at each level

Learning occurs both at individual level through improvements in dexterity and problem solving and at
group level through the development and refinement of organizational routines.

Process technology relative prices of factor inputs; importance of organizational innovations


Definition of design-for-manufacture;

Design-for-manufacture: designing products for ease of production rather than simply for functionality and
aesthetics.

Capacity utilization proportion of fixed costs to total costs;

Underutilization raises unit costs because fixed costs must be spread over fewer units of production. Pushing
output beyond normal full capacity also creates inefficiencies.

Sources of variations between firms in the cost of a given input

Locational differences in input prices
Ownership of low-cost resources of supply
Non-union labor
Bargaining power

Examples of particular cost drivers for different activities in the value chain of firm (e.g. of an automobile
manufacturer)

17
Differentiation (Porters definition); differentiation advantage; tangible differentiation versus intangible
differentiation; differentiation versus segmentation; broad-scope versus focused differentiation

Differentiation: providing something unique that is valuable to the buyer beyond simply offering a low price.

Differentiation advantage occurs when a firm can obtain from its differentiation a price premium in the
market that exceeds the cost of providing the differentiation.

Tangible differentiation: observable characteristics(including delivery, after-sales services & accessories);
Intangible differentiation: unobservable and subjective characteristics that appeal to the customers status, desire
for exclusivity, individuality, security and community.

Differentiation: how a firm distinguishes its offerings from those of its competitors(how a firm competes)
Segmentation: which customers, needs, localities a firm targets(where a firm competes)

Broad-scope differentiation: appealing to what is common between different customers(fast food chains).
Focused differentiation: appealing to what distinguishes different customer groups.(luxury products)

Advantage of differentiation over cost leadership; limits to the sustainability of cost advantage

Differentiation offers a more secure basis for competitive advantage than low-cost advantage. It would
appear to be more sustainable, large companies that consistently earn above-average returns on capital tend
to be those that have pursued differentiation through quality, branding, innovation.
A position of cost advantage is vulnerable to the emergence of new competitors from low-cost countries and
to adverse movements in exchange rates. Cost advantage can also be overturned by innovation.

Analyzing differentiation from demand side: multidimensional scaling; conjoint analysis; hedonic price
analysis; value curve analysis

Multidimensional scaling(MDS): permits customers perceptions of competing products to be represented
graphically in terms of key product attributes.

Conjoint-analysis: measures the strength of customer preferences for different product attributes to forecast
demand for hypothetical new product that comprises different bundles of product attributes.

Hedonic price analysis: uses regression to estimate the implicit market price for each product attribute.

Value curve analysis: maps competing products according to bundles of attributes in order to identify
opportunities for new products with a different combination of attributes.


Analyzing differentiation from supply side: examples of firms decision variable which constitute (Porters)
drivers of uniqueness

product features and product performance;
Complementary services(credit, delivery, repair);
Intensity of market activities(rate of advertising spending)
Technology embedded in design and manufacture;
Quality of purchased inputs;
Procedures that influence the customer experience;
Skill and experience of employees;
Location;
Degree of vertical integration.

Product integrity and its importance for a successful differentiation strategy; internal versus external integrity

Product integrity: the total balance of product features. It is the key to successful differentiation: consistency of
all aspects of the firms relationship with its customers.
18
Internal integrity: consistency between function and structure of the product
External integrity: fit between product features and customers objectives, values, life styles, etc.

Search goods versus experience goods; how the market for the latter corresponds to the prisoners dilemma;
Signaling quality to the customer as a means of resolving this prisoners dilemma; examples of signals of
quality

Search goods: goods whose qualities and characteristics can be ascertained by inspection.

Experience goods: goods whose qualities and consumptions are only recognized after consumptions.

Signaling can solve this issue: the more difficult it is to ascertain performance prior to purchase, the more
important signaling is.


Two roles filled by brands;

Guarantor of quality and reliability
Embodiment of identity and lifestyle

Direct versus indirect costs of differentiation

Direct costs of differentiation: higher-quality inputs, better trained employees, higher advertising costs and better
after-sales service.
Indirect costs of differentiation: arise through the interaction of differentiation variables with cost variables.

Examples of key strategic elements and of resource and organizational requirements of each of Porters generic
strategies; logical contradiction between the two generic strategies and the practical solution to that problem

Generic Strategy Key Strategy Elements Resources & Organizational Requirements
Cost leadership

Scale-efficient plants Access to Capital
Design for Manufacture Process Engineering Skills
Control of Overheads and R&D Frequent Reports
Process Innovation Tight Cost Control
Outsourcing Specialization of Jobs and Functions
Avoidance of Marginal Customer
Incentives Linked to Quantitative Target
Accounts
Differentiation
Emphasis on Branding, Advertising,
Design, Service,Quality and New
Product Development
Marketing Abilities
Product Engineering Skills
Cross-Functional Coordination
Creativity
Research Capability
Incentives Linked to Qualitative Performance
Targets

Stuck in the Middle: a logical contradiction exists between pursuing every imaginable cost saving (cost leadership)
and accepting the additional cost necessary to provide special features to the firms good or service (differentiation).
According to Porters original model, to purse these contradictory goals simultaneously is to be stuck in the
middle.
This issue is now regarded as being more conceptual than practical;
All firms seek to provide features that their target customers appreciate and all must be concerned with saving
costs where whose cost savings do not erode competitive advantage;
Strategic management requires making the appropriate decisions regarding this trade-off.


19
INDUSTRY EVOLUTION AND STRATEGIC CHANGE
Forces driving the industry life cycle; dominant design versus technical standard; how do the rates of product
and process innovation change over the phases of the industry life cycle and why? Examples of industry life
cycles varying with the particular industry

Demand growth
Creation & diffusion of knowledge

Dominant design: a product architecture that defines the look, functionality, and production method for the
product and becomes accepted by the industry as a whole; the overall configuration of a product or system.
Technical standard: a technology or specification that is important for compatibility.
A dominant design may or may not embody a technical standard, but they are closely related.

Evolution of industry structure and competition over the life cycle (especially with respect to demand, product,
competition, and key success factors); examples of driving forces of industry evolution and their impacts

Introduction Growth Maturity Decline
Demand
Technology
Products
Manufacturing
Trade
Competition
KSFs

Sources of organizational inertia Definitions: competency traps, institutional isomorphism, bounded
rationality and satisficing.

1. Organizational routines; competency traps: core capabilities become rigidities.
2. Social & political structures;
3. Conformity; institutional isomorphism: locks organizations into common structures and strategies that
makes it difficult for them to adapt to change.
4. Limited search; bounded rationality: human beings have limited information processing capacity, which
constrains the set of choices they can consider; Satisficing: the propensity for individuals (and organizations)
to terminate the search for better solutions when they reach a satisfactory level of performance rather than to
purse optimal performance.
5. Complementarities between strategy, structure, and systems.

Industry evolution: organizational ecology versus evolutionary economics

Organizational ecology: in relation to changes in the number of firms in an industry over time. Its idea is that
economic change is based on the assumption of organizational inertia. As a result, industry evolution occurs
through changes in the population of firms rather than by adaptation of firms themselves.(selection mechanism)
Evolutionary economics: focuses upon individual organizations as the primary agents of change.
20
Variations in required resources and capabilities over industry life cycle: innovators versus consolidators;

Innovator: pioneer of creation;

Consolidator: develops the creation.

Technological change: competence enhancing versus competence destroying; component level versus
architectural level ( architectural innovation ); new technology: sustaining versus disruptive

Competence enhancing: preserve, even strengthen the resources that add capabilities of incumbent firms.
Competence destroying: render obsolete the resources and capabilities of established firms.

Architectural level: requires a major reconfiguration of a companys strategy and organizational structure.
Component level:

Sustaining: augmenting existing performance attributes.
Disruptive: incorporating different performance attributes than the existing technology.

Challenge of dual strategies in facing change; how can this challenge be met? Two types of organizational
ambidexterity

Dual strategies: a strategy for today that focuses on exploiting existing resources and capabilities and current
market positions & a strategy for tomorrow based upon adaptation to future.
Companies are biased toward the exploitation of current resources and capabilities in relation to known
opportunities, rather than exploration for new opportunities, most firms will emphasize short-term over
long-term planning.

Ambidextrous organization:
Structural ambidexterity: exploration and exploitation are allocated to different organizational unit.
Contextual ambidexterity: same organizational units and people perform both E&E.

Dynamic capabilities (basic definition)

Dynamic capabilities: a firms ability to integrate, build, and reconfigure internal and external competences to
address rapidly changing environments.

Scenario analysis: definition; its value in dealing with environment change

Scenario analysis: a systematic way of thinking about how the future might unfold that builds on what we know
about current trends and signals.

Path dependency of organizational capabilities; core capabilities core rigidities; four components
for integrating organizational resources to create organizational capabilities;

Path dependency: a companys capabilities today are the result of its history.

The presence of established capabilities and their embedding within organizational structure and culture
present formidable barriers to building new capabilities. The more highly developed a firms organizational
capabilities, the greater the barrier they create. Hence the argument that core capabilities are
simultaneously core rigidities.

Process
Structure
Motivation
Organizational alignment
21
Two types of knowledge; characteristics and strategic implications of each type; definitions: knowledge
management, communities of practice, best practice transfer;

Type of Knowledge Characteristics Implications
Explicit: knowing about Easy and cheap to transfer: a public good
Easy to exploit within the firm but
difficult to protect from rivals
Weak basis for sustainable competitive
advantage
Tacit: knowing how
Difficult to articulate or codify
Transfer is slow and costly: requires
observation and practice
Rather difficult to replicate it internally
Sound basis for sustainable competitive
advantage

Knowledge management: the systematic leveraging of information and expertise to improve organizational
innovation, responsiveness, productivity and competency.

Communities of practice: informal, self-organizing networks for transferring experiential knowledge among
employees engaged in the same occupation.

Best practice transfer: where operations are geographically dispersed, different units are likely to develop local
innovations and improvements. It aims to identify then transfer superior practices.

Replication definition; strategic importance; the paradox of replication

Replication of knowledge: a power and lucrative source of scale economy.
Paradox of replication: more tacit, more important, more difficult to replicate.

Knowledge conversion internalization, externalization, socialization, combination,
Systematization (scalability)