lOMoARcPSD|18950275

Cheatsheet

Strategy (Singapore Management University)

Scan to open on Studeersnel

Studocu is not sponsored or endorsed by any college or university

Downloaded by Tú Anh Nguy?n (nguyentuanh120603@gmail.com)
 lOMoARcPSD|18950275

PESTEL - Exit barriers: Comprises of both economic and social factors. They include fixed costs that must be paid regardless of whether the ∙A strategic activity system conceives of a firm as a network of interconnected activities. A firm’s competitive advantage can result from its
∙PESTEL allows one to scan, monitor and evaluate the important external factors that might affect a firm. company is operating in the industry or not. A company exiting an industry may still have contractual obligations to suppliers, such as unique network of activities. The important point, however, is that a static fit with the current environment is not sufficient; rather, a firm’s
employee health care, retirement benefits, and severance pay. Social factors include elements such as emotional attachments to certain unique network of activities must evolve over time to take advantage of new opportunities and mitigate emerging threats.
1. Political geographic locations. E.g. In Michigan, entire communities still depend on GM, Ford, and Chrysler. SWOT analysis
∙Political factors result from the processes and actions of government bodies that can influence the decisions and behaviour of firms. ∙Use VRIO framework to determine strengths/weaknesses. Use PESTEL and Porter’s five forces for opportunities/threats. Following which, use
∙Although political factors are located in the firm’s general environment, where firms traditionally wield little influence, companies nevertheless 6. Strategic role of complements (additional force to consider) SWOT to develop strategic alternatives. However, a problem with SWOT is that a strength can also be a weakness and an opportunity can also be
increasingly work to shape and influence this realm. They do so by applying nonmarket strategies—that is, through lobbying, public relations, ∙A complement is a product, service, or competency that adds value to the original product offering when the two are used in tandem. a threat.
contributions, litigation, and so on, in ways that are favourable to the firm. ∙A company is a complementor to your company if customers value your product or service offering more when they are able to combine it with ∙How can the firm use its internal strengths to address opportunities/threats? How can the firm overcome internal weaknesses to address
the other company’s product or service. E.g. Samsung smartphones with Google’s Android. opportunities/threats
2. Economic
∙Economic factors in a firm’s external environment are largely macroeconomic, affecting economy-wide phenomena. Managers need to consider Upon evaluating the 5 forces model, strategic leaders need to consider the following 5 questions to increase the probability of successful entry: Chap 6
how the following 5 macroeconomic factors can affect firm strategy: 1. Who are the players? Generic business strategies
- Growth rates: In periods of economic expansion, consumer & business demand rises while competition among firms fall. While the 2. When to enter? Managers must make strategic trade-offs when deciding a strategic position. The 2 generic business strategies are (can be used by any firms):
opposite is true for recession, companies that focus on low-cost solutions may benefit since their demand for such product will rise. 3. How to enter? - Differentiation strategy: Seeks to create higher value for customers than the value that competitors create, by delivering products with
Boom periods can also overheat and lead to speculative asset bubbles. a. Leverage existing assets: Puts together a new combination of resources & capabilities it already has unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers.
- Levels of employment: Growth rates directly affect the level of employment. In boom times, unemployment tends to be low, and skilled b. Reconfigure value chains: E.g. New production process, new distribution channel - Cost-leadership strategy: Seeks to create the same or similar value for customers by delivering products or services at a lower cost than
human capital becomes a scarce and more expensive resource. c. Establish a niche in an existing industry and use this beach-head to grow further competitors, enabling the firm to offer lower prices to its customers.
- Interest rates: During periods of low real interest rates, firms can easily borrow money to finance growth. 4. What type of entry? ∙There is also “focused cost-leadership/differentiation”, which is the same regarding strategic position but narrower in competitive scope.
- Price stability: The amount of money in an economy. When there is too much money in an economy, we tend to see rising prices— o What is the type of entry in terms of product market, value chain activity, geography & type of business model.
inflation. Inflation tends to go with lower economic growth. Deflation describes a decrease in the overall price level. A sudden and 5. Where to enter? Differentiation strategy
pronounced drop in demand generally causes deflation, which in turn forces sellers to lower prices to motivate buyers. ∙The goal of a differentiation strategy is to add unique features that will increase the perceived value of goods and services in the minds of
- Currency exchange rate Industry dynamics consumers so they are willing to pay a higher price.
∙The 5 forces model does not consider the changing speed of an industry/rate of innovation. Industry structures are often dynamic. ∙A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V − C) is greater than
3. Sociocultural ∙Since a consolidated industry tends to be more profitable than a fragmented one, firms tend to change the industry structure in their favour, that of its competitors.
∙Sociocultural factors capture a society’s cultures, norms, and values. E.g. Growing number of health-conscious eaters in US. making it more consolidated through horizontal M&As. There is therefore an incentive to reduce the number of competitors in the industry. ∙Economies of scope describe the savings that come from producing two (or more) outputs at less cost than producing each output individually,
∙Demographic trends are also important sociocultural factors. These trends capture population characteristics related to age, gender, family size, ∙However, a consolidated industry structures may also break up and become more fragmented. This generally happens when there are external even though using the same resources and technology.
ethnicity, sexual orientation, religion, and socioeconomic class. shocks to an industry such as deregulation, new legislation, technological innovation, or globalization. ∙Managers can adjust a number of different levers to improve a firm’s strategic position. They are:
∙Another dynamic to be considered is industry convergence, a process whereby formerly unrelated industries begin to satisfy the same customer - Product features: Strong R&D capabilities are often needed to create superior product features.
4. Technological need. Industry convergence is often brought on by technological advances. E.g. Smartphone combines news, alarm clock, radio, landline etc. - Customer service
∙Technological factors capture the application of knowledge to create new processes and products. - Complements: Complements add value to a product when they are consumed in tandem.
Strategic group model
5. Ecological ∙This model aims to understand competitive behaviour and performance within an industry. We do this by: Cost leadership strategy
∙Ecological factors involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth. - Identify the most important strategic dimensions. They should be strategic commitments that are costly and difficult to reverse. ∙The goal of a cost-leadership strategy is to reduce the firm’s cost below that of its competitors while offering adequate value.
- Consider 2 key dimensions. ∙A firm can still gain a competitive advantage as long as its economic value creation exceeds that of its competitors. Factors managers can
6. Legal - Market share is represented by the size of the bubble. manipulate to keep costs low include:
∙Legal factors include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which ∙This model tells us that: - Cost of input factors
can have a direct bearing on a firm’s profit potential. - Competitive rivalry is strongest between firms that are within the same strategic group. Firms in the same group tend to follow a similar - Economies of scale: Fixed costs spread over a large output. A larger output also allows firms to invest in more specialised equipment.
strategy. - Taking advantage of certain physical properties: Some things increase more disproportionately when it becomes bigger. E.g. Walmart.
Fives Forces Model - The external environment affects strategic groups differently. E.g. During economic downturns, low-cost airline to take market share The minimum efficient scale (MES) is the output range needed to bring down the cost per unit as much as possible, allowing a firm to
∙Firm performance is determined primarily by two factors: away from legacy carriers. stake out the lowest cost position that is achievable through economies of scale.
- Industry effects: Firm performance attributed to the structure of the industry in which the firm competes. - Some strategic groups are more profitable than others. However, mobility barriers restrict movement between groups. Companies are
- Firm effects: Firm performance attributed to the actions managers take. often binded by strategic commitments, which are costly and not easily reversed. Learning curve:
∙Porter’s model identifies 5 key competitive forces that managers need to consider when analysing the industry environment and formulating ∙In a 90% learning curve, per-unit cost drops 10% every time output is doubled. 80% learning curve = 20% drop every time output is doubled.
competitive strategy: Chap 4 ∙Learning-curve effect is driven by increasing cumulative output within the existing technology over time. The only difference between two points
∙Core competencies are unique strengths embedded deep within a firm that allows for differentiation. They are developed through the interplay on the same learning curve is the size of the cumulative output. The underlying technology remains the same.
1. Threat of entry of resources and capabilities. ∙Learning curve is different from economies of scale as learning effects occur over time as output accumulates, while economies of scale capture
∙With the threat of additional capacity coming into an industry, incumbent firms may lower prices to make entry appear less attractive to the - Resources: Resources are any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting at 1 point in time when output increases.
potential new competitors, which would in turn reduce the overall industry’s profit potential, especially in industries with slow or no overall and executing a strategy. Resources can be either tangible or intangible. ∙If a firm’s cost advantage is due to economies of scale, a manager should worry less about employee turnover (and a potential loss in learning)
growth in demand. - Capabilities: Organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically. and more about drops in production runs. In contrast, if the firm’s low-cost position is based on complex learning, a manager should be much
∙The threat of entry by additional competitors may force incumbent firms to spend more to satisfy their existing customers. This spending reduces Capabilities are by nature intangible. more concerned if a key employee (e.g., a star engineer) was to leave.
an industry’s profit potential, especially if firms can’t raise prices.
Resource-based view Experience curve:
Firms can benefit from several sources of entry barriers: ∙This model aids in identifying core competencies. They are split: ∙In the experience curve, in contrast, we now change the underlying technology while holding cumulative output constant.
- Economies of scale - Tangible resources have physical attributes and are visible. ∙Learning by doing allows a firm to lower its per-unit costs by moving down a given learning curve, while experience-curve effects based on
- Network effects: Network effects describe the positive effect that one user of a product or service has on the value of that product for - Intangible resources have no physical attributes and thus are invisible. Examples of intangible resources are a firm’s culture, its process innovation allow a firm to leapfrog to a steeper learning curve, thereby driving down its per-unit costs.
other users. When network effects are present, the value of the product increases with the number of users. This is an example of a knowledge, brand equity, reputation, and intellectual property. CA is more likely to come from here as it cannot be easily bought.
positive externality. The threat of potential entry is reduced when network effects are present. E.g. Facebook ∙2 assumptions are made in the resource-based model: Competitive Threat of Power of Power of Threat of Rivalry among existing comp
- Customer switching costs - Resource heterogeneity: Comes from the insight that bundles of resources, capabilities, & competencies differ across firms. Each forces Entry Supplies Buyers Substitutes
- Capital requirements bundle is unique to an extent. E.g. 2 low-cost airlines compete in the same strategic group but they draw on different resource bundles. Benefits (D) ∙Protection ∙Increase ∙Protection as ∙Protection ∙Protection only if product has enough
- Advantages independent of size: Incumbent firms often possess cost and quality advantages that are independent of size. These - Resource immobility: Describes the insight that resources tend to be “sticky” and don’t move easily from firm to firm. Because of that due to in input differentiated against differential appeal to command high
advantages can be based on brand loyalty, proprietary technology, preferential access to raw materials and distribution channels, stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time. intangible price can products are substitutes due price
favourable geographic locations, and cumulative learning and experience effects. ∙We use the VRIO framework to further identify which type of resources are key to superior firm performances. resources be passed not perfect to differential
- Government policy - Valuable: One that enables the firm to exploit an external opportunity/offset an external threat. If no → Competitive disadvantage. to imitations appeal
- Credible threat of retaliation: Potential new entrants must also anticipate how incumbent firms will react. A credible threat of - Rare: A resource is rare if only one or a few firms possess it. If no → Competitive parity. customers
retaliation by incumbent firms often deters entry. - Costly to imitate: A resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a Benefits (C) ∙Protection ∙Increase ∙Protection as ∙Protection ∙Protection as lowest-cost firm will win
reasonable price. If resource is valuable, rare, and costly to imitate, then it is an internal strength and a core competency. If no → due to in input decrease in against
2. Power of suppliers Temporary CA economies of price can sale prices substitutes by
∙Bargaining power of suppliers is high when: A firm that enjoys a competitive advantage can attract significant attention from its competitors. They will attempt to negate a firm’s scale be can be further
- The supplier’s industry is more concentrated than the industry it sells to. resource advantage by directly imitating the resource (direct imitation) or by providing a comparable product (substitution). Firms can absorbed absorbed lowering its
- Suppliers do not depend heavily on the industry for a large portion of their revenues. also combine both direct imitation and substitution. E.g. Samsung Galaxy on Apple’s iPhone prices
- Incumbent firms face significant switching costs when changing suppliers. - Organised to capture value: A firm must be organized to capture value to exploit the resources — that is, it must have in place an Risks (D) ∙Erosions of ∙Erosions of margin ∙Replacement, ∙Focus of competition shifts to price
- Suppliers offer products that are differentiated. effective organizational structure and coordinating systems. If no → Temporary CA. If Yes → Sustainable CA. margin especially, (non-price for cost-leader)
Risks (C)
- There are no readily available substitutes for the products or services that the suppliers offer. ∙Replacement when faced ∙Increase differentiation increases cost
- Suppliers can credibly threaten to forward-integrate into the industry. How can we sustain a competitive advantage? with innovation more than value (only D)
∙No competitive advantage can be sustained indefinitely but there are factors that can make it difficult for competitors to imitate. Barriers to ∙Increase differentiation raises cost
3. Power of buyers imitation are examples of isolating mechanisms, and they include: above threshold (opposite for C)
∙Power of buyers is high when: - Better expectations of future resource value: Sometimes firms can acquire resources at a low cost, which can lay the foundation for a
- There are a few buyers and each buyer purchases large quantities relative to the size of a single seller. competitive advantage later when expectations about the future of the resource turn out to be more accurate than others.
Blue Ocean Strategy
- The industry’s products are standardized or undifferentiated commodities. - Path dependence: Describes a process in which the options one faces in a current situation are limited by decisions made in the past.
∙Generally, managers should not try to increase perceived consumer value while lowering costs.
- Buyers face low or no switching costs. Path dependence also says that time cannot be compressed at will. Trying to achieve the same outcome in less time, even with higher
∙Blue ocean strategy successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-
- Buyers can credibly threaten to backwardly integrate into the industry. investments, tends to lead to inferior results due to time compression diseconomies. E.g. GM vs Tesla in creating electric cars.
offs in those two distinct strategic positions.
- Causal ambiguity: Describes a situation in which the cause and effect of a phenomenon are not readily apparent. E.g. Apple has several
∙Blue oceans = untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth.
4. Threat of substitutes successful innovation products, but a deep understanding of why Apple is so successful is very difficult.
∙Red oceans = known market space of existing industries. Rivalry among existing firms is cut-throat as the market space is crowded and
∙The threat of substitutes is the idea that products or services available from outside the given industry will come close to meeting the needs of - Social complexity: Describes situations in which different social and business systems interact. Social complexity, however, emerges
competition is a zero-sum game. Competition is focused mainly on price. Any market share gain comes at the expense of other competitors.
current customers. when two or more such systems are combined. E.g. Six Sigma and ISO 9000.
∙The threat of substitutes is high when: - Intellectual property (IP) protection: A critical intangible resource that can also help sustain a competitive advantage.
Value innovation:
- The substitute offers an attractive price-performance trade-off.
∙A blue ocean strategy can only succeed by resolving trade-offs between the 2 generic strategic positions. This is done via value innovation, which
- The buyers cost of switching to the substitute is low. Dynamic capabilities perspective
is the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a
∙A core competency can turn into a core rigidity if a firm relies too long on the competency without upgrading as the environment changes.
cornerstone of blue ocean strategy.
5. Threat of rivalry among existing competitors ∙Dynamic capabilities perspective: A model that emphasizes a firm’s ability to modify and leverage its resource base in a way that enables it to
∙The questions that needs to be asked include:
∙The intensity of rivalry among existing competitors is determined largely by the following factors: gain and sustain competitive advantage in a constantly changing environment.
- Value Innovation—Lower Costs
- Competitive industry structure. The 4 structures are perfect competition, monopolistic competition, oligopoly and monopoly. ∙One way to think about developing dynamic capabilities is to distinguish between resource stocks and resource flows. Resource stocks are the
o 1. Eliminate. Which of the factors that the industry takes for granted should be eliminated?
o Perfect competition: Rare but commodities such as copper and iron follow this structure. firm’s current level of intangible resources. Resource flows are the firm’s level of investments to maintain or build a resource.
o 2. Reduce. Which of the factors should be reduced well below the industry’s standard?
o Monopolistic: Differentiated products, many firms, some pricing power, medium entry barriers ∙According to the dynamic capabilities perspective, the managers’ task is to decide which investments to make over time in order to best position
- Value Innovation—Increase Perceived Consumer Benefits
o Oligopoly: Competing firms are interdependent. The action of 1 firm influences the behaviours of others. Each firm the firm for competitive advantage in a changing environment. Moreover, managers also need to monitor the existing intangible resource stocks
o 3. Raise. Which of the factors should be raised well above the industry’s standard?
must consider the strategic actions of others. Non-price competition is the preferred mode of competition here. and their attrition rates due to leakage and forgetting.
o 4. Create. Which factors should be created that the industry has never offered?
- Industry growth: In periods of high growth, consumer demand rises, and price competition among firms frequently decreases. In
∙Blue ocean strategy gone bad → Firm becomes stuck in the middle. This leads to inferior performance and a resulting competitive disadvantage.
contrast, rivalry among competitors becomes fierce during slow industry growth as rivals can gain only at the expense of others. Value chain
Competitive rivalry based solely on cutting prices is bad to profitability as it transfers most of the value created to the customers. ∙The value chain describes the internal activities a firm engages in when transforming inputs into outputs.
Strategy canvas:
- Strategic commitments: If firms make strategic commitments to compete in an industry, rivalry among competitors is likely to be more ∙The primary activities add value directly as the firm transforms inputs into outputs. They include: SCM, Ops, Distribution, Marketing & Sales,
∙The value curve is the basic component of the strategy canvas. It depicts a company’s relative performance across its industry’s factors of
intense. Strategic commitments are firm actions that are costly, long-term oriented, and difficult to reverse. After-Sales Service. Other activities, called support activities, add value indirectly. They include: R&D, Information Systems, HR, Accounting &
competition. A strong value curve has focus and divergence, and it can hint what strategy is being undertaken or should be undertaken.
Finance, Firm Infrastructure.

Downloaded by Tú Anh Nguy?n (nguyentuanh120603@gmail.com)


∙A value curve that zigzags across the strategy canvas indicates a lack of effectiveness in its strategic profile.
Corporate strategy
∙Corporate strategy comprises the decisions that leaders make and the actions taken in the quest for competitive advantage in several industries
and markets simultaneously. It provides answers to the key question of where to compete.
∙Executives must consider the following when formulating a corporate strategy:
1. Vertical integration: In what stages of the industry value chain should the company participate? The industry value chain
describes the transformation of raw materials into finished goods and services along distinct vertical stages.
2. Diversification: What range of products and services should the company offer?
3. Geographic scope: Where should the firm compete geographically in terms of regional, national, or international markets?
Firms need to grow because:
1. Increase profits.
2. Lower costs.
3. Increase market power.
4. Reduce risk.
5. Motivate management: Growing firms afford career opportunities and professional development for employees.
The underlying concepts that help executives make corporate strategic decisions are:
- Core competencies
- Economies of scale
- Economies of scope
- Transaction costs: All costs associated with an economic exchange. Thinking about transaction costs enable managers to answer the
question of whether it is cost-effective for their firm to expand its boundaries through vertical integration or diversification.
Evaluating different options firms have to organise economic activity
∙Transaction cost economics is a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is
central to formulating a corporate strategy that is more likely to lead to competitive advantage.
∙Transaction costs includes both external & internal costs:
- External transaction costs: When companies transact in the open market, they incur external transaction costs: the costs of searching
for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.
- Internal transaction costs: Costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs.
Should the firm make or buy?
∙When the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market (Cin–house < Cmarket), then the
firm should vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs.
∙Advantages of organising economic activities within firms include:
- The ability to make command-and-control decisions by fiat along clear hierarchical lines of authority.
- Coordination of highly complex tasks to allow for specialized division of labour.
- Transaction-specific investments such as specialised equipment that is highly valuable within the firm, but of little use to others.
- Creation of a community of knowledge, meaning employees within firms have ongoing relationships, exchanging ideas and working
closely together to solve problems.
∙Disadvantages of firms include:
- Administrative costs because of necessary bureaucracy.
- Low-powered incentives, such as hourly wages and salaries. These often are less attractive motivators than the entrepreneurial
opportunities and rewards that can be obtained in the open market.
- Principal–agent problem: Arises when an agent (manager) that performs activities on behalf of the principal (owner) pursues his own
interests instead. While some degree of this problem is inevitable, one way to overcome it is to give stock options to manager.
∙Advantages of markets include:
- High-powered incentives: High-powered incentives of the open market include the entrepreneur’s ability to capture the venture’s
profit, to take a new venture through an initial public offering (IPO), or to be acquired by an existing firm.
- Increased flexibility: Transacting in markets enables those who wish to purchase goods to compare prices and services among many
different providers.
∙Disadvantages of markets include:
- Search costs: The biggest disadvantage of transacting in markets entails nontrivial search costs. A firm faces search costs when it must
scour the market to find reliable suppliers from among the many firms competing to offer similar products and services.
- Opportunism by other parties: Opportunism is behaviour characterized by self-interest seeking with guile.
- Incomplete contracting: Although market transactions are based on implicit and explicit contracts, all contracts are incomplete to some
extent, because not all future contingencies can be anticipated at the time of contracting.
- Enforcement of contracts: It often is difficult, costly, and time-consuming to enforce legal contracts.
∙Frequently, sellers have better information about products and services than buyers, which creates information asymmetry, a situation in which
one party is more informed than another, because of the possession of private information. Unequal information can lead to a lemons problem.
The important take-away here is caveat emptor—buyer beware. Information asymmetries can result in the crowding out of desirable goods and
services by inferior ones.
Alternative to make-or-buy:
1. Short-term contracts:
∙Firm sends out requests for proposals (RFPs) to companies and competitive bidding is initiated. Contracts are usually less than one year.
∙This approach allows a somewhat longer planning period than individual market transactions. Additionally, the buying firm can demand lower
prices due to the competitive bidding process.
∙Drawback: Firms responding to the RFP have no incentive to make any transaction-specific investments (e.g., buy new machinery to improve
product quality) due to the short duration of the contract.
2. Strategic alliance
∙Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of
developing processes, products, or services.
∙Long-term contracts usually have a duration greater than a year and help facilitate transaction-specific investments. 2 examples are:
- Licensing: A form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property.
- Franchising: A long-term contract in which a franchisor grants a franchisee the right to use the franchisor’s trademark and business
processes to offer goods and services that carry the franchisor’s brand name. Besides providing the capital to finance the expansion of
the chain, the franchisee generally pays an up-front (buy-in) lump sum to the franchisor plus a percentage of revenues.
∙Equity alliance: A partnership in which at least one partner takes partial ownership in the other partner. The taking of equity tends to signal
greater commitment to the partnership.
∙In strategic alliances based on a mere contractual agreement, one transaction partner could attempt to hold up the other by demanding lower
prices or threatening to walk away from the agreement. Hence, an equity alliance helps make a credible commitment – a long-term strategic
decision that is both difficult and costly to reverse.
∙Joint ventures: Two or more partners create and jointly own a new organization. Since the partners contribute equity to a joint venture, they
make a long-term commitment, which in turn facilitates transaction-specific investments.
3. Parent-subsidiary relationship
∙In a parent-subsidiary relationship, the corporate parent owns the subsidiary and can direct it via command and control. Transaction costs that
arise are frequently due to political turf battles, which may include the capital budgeting process and transfer prices, among other areas. Other
areas of potential conflict concern how centralized or decentralized a subsidiary unit should be run.
Vertical integration
∙The first key question when formulating corporate strategy is: In what stages of the industry value chain should the firm participate?
∙Vertical integration is the firm’s ownership of its production of needed inputs or of the channels by which it distributes its outputs.
∙Not all industry value chain stages are equally profitable.
∙Backward vertical integration: Involves moving ownership of activities upstream to the originating (inputs) point of the value chain.
∙Forward vertical integration: Involves moving ownership of activities closer to the end (customer) point of the value chain.
Benefits of vertical integration:
lOMoARcPSD|18950275
- Lowering costs 2. Tradability. How tradable are the targeted resources that may be available externally?
- Improving quality ∙Tradable = firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource.
- Facilitating scheduling and planning ∙The implication is that if a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual
- Facilitating investments in specialized assets: Specialized assets have a high opportunity cost. They have significantly more value in agreement. If the resource in question is not easily tradable, then the firm needs to consider either a deeper strategic alliance through an equity
their intended use than in their next-best use. They can come in several forms: alliance or a joint venture, or an outright acquisition.
o Site specificity—assets required to be co-located. E.g. Equipment for mining
o Physical-asset specificity—assets whose physical properties are designed to satisfy a particular customer 3. Closeness. How close do you need to be to your external resource partner?
o Human-asset specificity—investments made in human capital to acquire unique knowledge and skills, such as ∙M&As are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is
mastering the routines and procedures of a specific organization, which are not transferable to a different firm. necessary to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first
- Securing critical supplies and distribution channels consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.
Risks of vertical integration:
- Increasing costs: In-house suppliers tend to have higher cost structures as they are not exposed to market competition. Knowing there 4. Integration. How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?
will always be a buyer for their products reduces their incentives to lower costs. Also, open market suppliers serve a much larger ∙The list of post-integration failures is long. Only if the three prior conditions (low relevancy, low tradability, and high need for closeness) shown in
market, achieving higher economies of scale that elude in-house suppliers. Organizational complexity increases with higher levels of the decision tree in are met, should the firm’s strategic leaders consider M&A.
vertical integration, thereby increasing administrative costs such as determining the appropriate transfer prices between an in-house
supplier and buyer. Administrative costs are part of internal transaction costs and arise from the coordination of multiple divisions. Strategic alliances
- Reducing quality: The knowledge that there will always be a buyer for their products can also reduce the incentive to increase quality or ∙Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, & capabilities with the intent of
come up with innovative new products. Moreover, given their larger scale and greater exposure to more customers, external suppliers developing products.
often can reap higher learning and experience effects and so develop unique capabilities or quality improvements. ∙Relational view of competitive advantage: Critical resources & capabilities are often embedded in strategic alliances that span firm boundaries.
- Reducing flexibility: Occurs when faced with changes in the external environment such as fluctuations in demand and tech change.
- Increasing the potential for legal repercussions. Why do firms enter strategic alliances?
- Strengthen competitive position.
When does vertical integration make sense? - Enter new markets.
∙The main reason to vertically integrate is due to failure of vertical markets. Vertical market failure occurs when transactions within the industry - Hedge against uncertainty: A real-options perspective to strategic decision-making breaks down a larger investment decision into a set
value chain are too risky, and alternatives to integration are too costly or difficult to administer. of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information at
predetermined stages. At each stage, after new information is revealed, the firm evaluates whether or not to make further investments.
Alternatives to vertical integration: - Access critical complementary assets.
1. Taper integration - Learn new capabilities: Co-opetition describes cooperation by competitors to achieve a strategic objective. Co-opetition can lead to
∙A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies learning races in strategic alliances, a situation in which both partners are motivated to form an alliance for learning, but the rate at
and/or is forwardly integrated but also relies on outside market firms for some of its distribution. which the firms learn may vary.
∙E.g. Apple, they own retail outlets but also use other retailers, both the brick-and-mortar type and online.
∙Benefits: Types of strategic alliance:
- It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible. - Non-equity alliances: In a non-equity alliance, firms tend to share explicit knowledge—knowledge that can be codified. A common way
- Taper integration also enhances a firm’s flexibility. For example, when adjusting to fluctuations in demand, a firm could cut back on the to do so is via licensing agreements.
finished goods it delivers to external retailers while continuing to stock its own stores. Pros: Flexible, fast and easy to initiate and terminate.
- Using taper integration, firms can combine internal and external knowledge, possibly paving the path for innovation. Cons: Since they are temporary in nature, they can produce weak ties between partners → lack of trust and commitment
- Equity alliances: Equity alliances allow for the sharing of tacit knowledge—knowledge that cannot be codified. Tacit knowledge
2. Strategic outsourcing concerns knowing how to do a certain task. It can be acquired only through actively participating in the process. In an equity alliance,
∙Moving one or more internal value chain activities outside the firm’s boundaries to other firms in the industry value chain. therefore, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible.
∙When outsourced activities take place outside the home country, the correct term is offshoring (or offshore outsourcing). Corporate venture capital (CVC) investments also fall under equity alliances. They are equity investments by established firms in
entrepreneurial ventures. Equity alliances are frequently stepping-stones toward full integration of the partner firms either through a
Corporate diversification merger or an acquisition (“try before you buy”).
∙Diversification answer questions about the no. of markets to compete in and where to compete geographically. Pros: Stronger tie, trust & commitment can emerge, window into new technology
∙There are various general diversification strategies: Cons: Less flexible, slower, can entail significant investment
- Product diversification strategy: Corporate strategy in which a firm is active in several different product markets. - Joint ventures: Standalone organization created and jointly owned by two or more parent companies. Both tacit and implicit knowledge
- Geographic diversification strategy: Corporate strategy in which a firm is active in several different countries. are shared more significantly than the others.
- Product-market diversification strategy: Combines both product & geographic diversification. Pros: Strongest tie, trust & commitment likely to emerge, may be required by institutional selling
Cons: Long negotiations & significant investments, long-term solution, JV managers have 2 bosses to report to
Types of corporate diversification:
- Single business: >95% revenue from primary business Effective alliance management is needed to gain a sustainable competitive advantage. Alliance management capability is a firm’s ability to
- Dominant business: 70 – 95% effectively manage three alliance-related tasks concurrently, often across a portfolio of many different alliances:
- Related diversification: <70% 1. Partner selection and alliance formation
o Related-constrained: New businesses only leverage their existing competencies & resources. E.g. ExxonMobil ∙Partner compatibility and partner commitment are necessary conditions for successful alliance formation. Partner compatibility captures aspects
o Related-linked: New business activities share only a limited number of linkages. E.g. Amazon of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-
- Unrelated-diversification (conglomerate): Business share few competencies. E.g. Samsung term sacrifices to ensure long-term rewards.
Leveraging core competencies for corporate diversification: 2. Alliance design & governance
∙The core competence market matrix is a framework to guide corporate diversification strategy by analysing possible combinations of ∙Once two or more firms agree to pursue an alliance, managers must then design the alliance and choose an appropriate governance mechanism
existing/new core competencies and existing/new markets: from among the three options:
- Existing market & core competencies (CC): Leveraging core competencies to improve current market position - Non-equity contractual agreement, Equity alliances, or Joint venture
- Existing market, New CC: Building new CC to protect and extend current market position ∙In addition to the formal governance mechanisms, interorganizational trust is a critical dimension of alliance success.
- New market, existing CC: Redeploying and recombining CC to compete in markets of the future
- New market & CC: Building new CC to create and compete in markets of the future 3. Post-formation alliance management
∙Firms that pursue unrelated diversification are often unable to create additional value. They experience a diversification discount: The stock ∙To be a source of competitive advantage, the partnership needs to create resource combinations that obey VRIO. This can most likely be
price of such highly diversified firms is valued at less than the sum of their individual business units. accomplished if the alliance partners make relation-specific investments, establish knowledge-sharing routines, and build interfirm trust
∙In contrast, companies that pursue related diversification are more likely to improve their performance. They create a diversification premium: ∙Firms can build alliance management capability through repeated experiences over time. In support of this idea, several empirical studies have
The stock price of related-diversification firms is valued at greater than the sum of their individual business units. shown that firms move down the learning curve and become better at managing alliances through repeated alliance exposure.
∙However, some research suggests that an unrelated diversification strategy can be advantageous in emerging economies because it allows the ∙To accomplish effective alliance management, strategy scholars suggest that firms create a dedicated alliance function, led by a vice president or
conglomerate to overcome institutional weaknesses in emerging economies such as a lack of a functioning capital market. director of alliance management, and endowed with its own resources and support staff.
∙For diversification to enhance performance, it must do at least 1 of the below:
- Provide economies of scale, which reduces costs. Mergers and acquisitions
Question Mark Star
- Exploit economies of scope, which increases value. ∙A merger is the joining of two independent companies to form a combined entity. Mergers tend to be friendly. E.g. Live Nation & Ticketmaster
Earnings: Low, unstable, or Earnings: High, stable, or
- Reduce costs and increase value. ∙An acquisition describes the purchase or takeover of one company by another. Acquisitions can be friendly or unfriendly. When a target firm
growing growing
does not want to be acquired, the acquisition is considered a hostile takeover. E.g. Daimler’s acquisition of Chrysler.
Cash flow: Negative Cash flow: Neutral
∙Other potential benefits to firm performance when following ∙1st dimension is friendliness. The 2nd dimension is size. Combining of 2 companies = merger. Larger firms buy up small companies = acquisition.
Strategy: Increase market share Strategy: Hold or invest for
a diversification strategy include financial economies,
or harvest/divest growth
resulting from restructuring and using internal capital Why do firms merge with competitors?
markets: Dog Cash Cow ∙Horizontal integration is the process of merging with competitors, leading to industry consolidation. Generally, firms horizontally integrate (i.e.,
- Restructuring: Describes the process of reorganizing Earnings: Low, unstable Earnings: High, stable acquiring a competitor) if the target firm is more valuable inside the acquiring firm than as a continued standalone company.
Cash flow: Neutral or negative Cash flow: High, stable
and divesting business units and activities to refocus ∙The 3 main benefits to a horizontal integration are:
Strategy: Harvest/divest Strategy: Hold
a company to better leverage its core competencies. - Reduction in competitive intensity: As a whole, the industry structure becomes more consolidated and potentially more profitable.
Use the BCG growth-share matrix for this. Horizontal integration can favourably affect several of Porter’s five forces for the surviving firms such as strengthening bargaining power
- Internal capital markets: Internal capital markets can be a source of value creation in a diversification strategy if the conglomerate’s HQ for suppliers and buyers and reducing the threat of entry.
does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets. - Lower costs: Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value creation,
and in turn their performance.
Chap 9 - Increased differentiation: Horizontal integration through M&A can help firms strengthen their competitive positions by increasing the
Build-borrow-buy framework differentiation of their product and service offerings. In particular, horizontal integration can do this by filling gaps in a firm’s product
∙The build-borrow-or-buy framework provides a conceptual model that aids firms in deciding whether to pursue internal development (build), offering, allowing the combined entity to offer a complete suite of products and services.
enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).
∙Note that in the build-borrow-or-buy model, the term resources are defined broadly to include capabilities and competencies. Why do firms acquire other firms? 3 main reasons include:
- How relevant are internal resources? If high, build. If low, next. - To gain access to new markets and distribution channels
- How tradable are the targeted resources? If high, use contractual alliance such as contract/licensing. If low, next. - To gain access to a new capability or competency
- How to close to your resource partner? If low, use alliance with equity such as equity alliance/joint venture. If high, next. - To pre-empt rivals: Firms may acquire promising startups just to prevent competitors from doing so.
- How well can you integrate the target firm? If high, acquire. If low, reformulate strategy or revisit framework again. ∙M&As on average destroy rather than create shareholder value. Reasons for these include:
- Principal–agent problems: A related problem is managerial hubris, a form of self-delusion in which managers convince themselves of
4 questions must be asked to determine whether to build, borrow or buy: their superior skills in the face of clear evidence to the contrary. Managerial hubris comes in two forms:
1. Relevancy. How relevant are the firm’s existing internal resources to solving the resource gap? o Managers of the acquiring company are convinced that they can manage the business of the target company more
∙Firms evaluate the relevance of internal resources in two ways. They test whether resources are: effectively → create additional shareholder value. Often used to justify an unrelated diversification strategy.
a. similar to those the firm needs to develop and o Although most managers are aware that the majority of acquisitions destroy rather than create shareholder value,
b. superior to those of competitors in the targeted area (use VRIO) they see themselves as the exceptions to the rule.
∙If both conditions are met, then the firm’s internal resources are relevant and the firm should pursue internal development. - The desire to overcome competitive disadvantage
- Superior acquisition and integration capability
Downloaded by Tú Anh Nguy?n (nguyentuanh120603@gmail.com)