Strategic Management Application to Business Plan Development:

A good strategy is a strategy that actually generates such advantages. Is based on a set of assumptions and hypothesis about the way competition in this industry is likely to evolve and how that evolution can be exploited to earn a profit. the greater the extent to which these assumptions and hypothesis accurately reflect how competition in this industry actually evolves, the more likely it is that a firm will gain competitive advantage from implementing its strategies.

The Strategic Management ProcessIs a sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages.

Mission & ObjectivesMission is a firms long term purpose. Missions define both what a firm aspires to be in the long run and what it wants to avoid in the meantime. Missions are often written down in the form of mission statements.

Whereas a firms mission is a broad statement of its purpose and values, its objectives are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission. High-quality objectives are tightly connected to elements of a firms mission and are relatively easy to measure and track over time.

Internal & External AnalysisExternal analysis a firm identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing. Internal analysis helps a firm identify its organizational strengths and weaknesses. It also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages.

Strategic ChoiceA firm is ready to choose its theory of how to gain competitive advantage. The strategic choices available to firms fall into two large categories: business-level strategies and corporate-level strategies.

Business-level strategies are actions firms take to gain competitive advantages in a single market or industry. While, corporate-level strategies are actions firms take ot gain competitive advantages by operating in multiple markets or industries simultaneously.

Based on the strategic management process, the objective when making a strategic choice is to choose a strategy that 1. supports the firms mission2. is consistent with a firms objectives3. exploits opportunities in a firms environment with a firms strengths4. neutralizes threats in a firms environment while avoiding a firms weaknesses.

Strategic ImplementationOccurs when a firm adopts organizational policies and practices that are consistent with its strategy. Three specific organizational policies and practices are particularly important in implementing a strategy: a firms formal organizational structure, its formal and informal management control systems, and its employee compensation policies.

What is Competitive Advantage?A firm has a competitive advantage when it is able to create more economic value than rival firms. Economic value is simply the difference between the perceived benefits gained by a customer that purchases a firms products or services and the full economic cost of these products or services. Thus, size of a firms competitive advantage is the difference between the economic value a firm is able to create and the economic value its rivals are able to create.

A firms competitive advantage can be temporary or sustained. Temporary competitive advantage is a competitive advantage that lasts for a very short period of time. A sustained competitive advantage, in contrast, can last much longer. Firms that create the same economic value as their rivals experience competitive parity.

Measuring Competitive AdvantageThe benefits of a firms product or services are always a matter of customer perception, and perceptions are not easy to measure. Also, the total costs associated with producing a particular product or service may not always be easy to identify or associate with a particular product or service. Despite the very real challenges associated with measuring a firms competitive advantage, two approaches have emerged. The first estimates a firms competitive advantage by examining its accounting performance; the second examines the firms economic performance.

Emergent vs. Intended StrategiesEmergent are theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented.

In reality, it will often be the case that at the time a firm chooses its strategies, some of the information needed to complete the strategic management process may simply not be available. In such a situation, a firms ability to change its strategies quickly to respond to emergent trends in an industry may be as important a source of competitive advantage as the ability to complete the strategic management process.

Evaluating a Firms External Environment

Any analysis of the threats and opportunities facing a firm must begin with an understanding of the general environment within which a firm operates. This general environment consists of broad trends in the context within which a firm operates that can have an impact on a firms strategic choices. The general environment consists of six interrelated elements:1. technological change2. demographic trends3. cultural trends4. economic climate 5. legal and political condition6. specific international events

Technological changes create both opportunities, as firms begin to explore how to use technology to create new products and services, and threats, as technological changes forces firms to rethink their technological strategies.

Demographics is the distribution of individuals in a society in terms of age, sex, martial status, income, ethnicity, and other personal attributes that may determine buying patterns. Understanding this information can help a firm determine whether its products or services will appeal to customers and how many potential customers for these products or services it might have.

Cultural trends is the third element, where the values, beliefs, and norms that guide behaviour in a society. These values, beliefs, and norms define what is right and wrong in a society, what is acceptable and unacceptable, what is fashionable and unfashionable.

The economic climate is the overall health of the economic systems within which a firm operates. The health of the economy varies over time in a distinct pattern: patterns of relative prosperity, when demand for goods and services is high and unemployment is low, are followed by periods of relatively low prosperity, when demand for goods and services are low and unemployment is high.

The legal and political dimensions of an organizations general environment are the laws and the legal systems impact on business, together with the general nature of the relationship between government and business.

Specific international events include events such as civil wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions.

A Model of Environmental Threats

to a firm seeking competitive advantage, an environmental threats is any individual, group, or organization outside a firm that seeks to reduce the level of that firms performance. Threats increase a firms costs, decrease a firms revenues, or in other ways reduce a firms performance.

1. Threat from New CompetitionNew competitors are firms that have either recently started operating in an industry or that threaten to begin operations in an industry soon. New competitors are motivated to enter into an industry by the superior profits that some incumbent firms in that industry may be earning. Firms seeking these high profits enter the industry, thereby increasing the level of industry competition and reducing the performance of incumbent firms. With the absence of any barriers, entry will continue as long as any firms in the industry are earning competitive advantages, and entry will cease when all incumbent firms are earning competitive parity.

The extent to which new competitors act as a threat to an incumbent firms performance depends on the cost of entry. If the cost of entry into an industry is greater than the potential profits a new competitor could obtain by entering, then entry will not be forthcoming, and new competitors are not a threat to incumbent firms. However, of the cost of entry is lower than the return from entry, entry will occur until the profits derived from entry are less than the cost of entry.

Possible barriers of Entry into an Industry:1. Economies of scale exists in an industry when a firms costs fall as a function of its volume of production. For economies of scale to act as a barrier to entry, the relationship between the volume of production and firm costs must have the shape of the line in figure below.

if the cost of engaging in these barrier-busting activities is greater than the return from entry, entry will not occur, even if incumbent firms are earning positive profits.2. Product differentiation incumbent firms possess brand identification and customer loyalty that potential new competitors do not. Brand identification and customer loyalty serve as entry barriers because new competitors not only have to absorb that standard costs associated with starting production in a new industry; they also have to absorb the costs associated with overcoming incumbent firms differentiation advantages. If the cost of overcoming these advantages is greater than the potential return form entering an industry, entry will not occur even if incumbent firms are earning positive profits. 3. Cost advantages independent of scale incumbent firms may have a whole range of cost advantages, independent of economies of scale, compared to new competitors. These cost advantages can act to deter entry because new competitors will find themselves at a cost disadvantage vis--vis incumbent firm with these cost advantages. In some settings, incumbent firms enjoying cost advantages, independent of scale, can earn superior profits and still not be threatened by new entry because the cost of overcoming those advantages can be prohibitive. Examples of these cost advantage, independent of scale, are include: Proprietary technology when incumbent firms have secret or patented technology that reduces their costs below the costs of potential entrants, potential new competitors must develop substitute technologies to compete. The cost of developing this technology can act as a barrier to entry. Managerial know-how when incumbent firms have taken-for-granted knowledge, skills, and information that take years to develop and that is not possessed by potential new competitors. The cost of developing this know-how can act as a barrier to entry. Favourable access to raw materials when incumbent firms have low-cost access to critical raw materials not enjoyed by potential new competitors. The cost of gaining similar access can act as a barrier to entry. Learning-curve cost advantages when the cumulative volume of production of incumbent firms gives them cost advantages not enjoyed by potential new competitors. These cost disadvantages of potential entrants can act as a barrier to entry.4. Government regulation of entry governments, for their own reasons, may decide to increase the cost of entry into an industry. This occurs most frequently when a firm operates as a government regulated monopoly. The government has concluded that it is in a better position to ensire that specific products or services are made available to the population at reasonable prices than competitive markets force.

2. Threat form Existing CompetitorsDirect competition threatens firms by reducing their economic profits. High levels of direct competition are indicated by such actions as frequent price cutting by firms in an industry (price discounts in the airline industry), frequent introduction of new products by new products by firms in an industry (continuous product introductions in consumer electronics), intense advertising campaigns (pepsi vs coke), and rapid competitive actions and reactions in an industry (competing airlines quickly matching the discounts of other airlines). Attributes of an Industry that Increase the Threat of Direct Competiton: Large number of competing firms that are roughly the same size Slow industry growth Lack of product differentiation Capacity added in large increments

3. Threat of Substitute ProductsThe products or services provided by a firms direct competitors meet approximately the same customer needs in the same ways as the products or services provided by the firm itself. Substitutes meet approximately the same customer needs, but do so in difficult ways. Substitutes place a ceiling on the prices firms in the industry can charge and on the profits firms in an industry can earn. In the extreme, substitutes can ultimately replace an industrys product and services.

4. Threat of Supplier Leverage Suppliers make a wide variety of raw materials, labour, and other critical assets available to firms. Suppliers can threaten the performance of firms in an industry by increasing the price of their suppliers or by reducing the quality of those suppliers. Some attributes that can lead to high levels of threat are listed: Suppliers industry is dominated by small number of firms Suppliers well unique or highly differentiated products Suppliers are not threatened by subsititutes Suppliers threaten forward vertical integration Firms are not important customers for suppliers

5. Threat from Buyers Influence Buyers purchase a firms products or services. Whereas powerful suppliers act to increase a firms costs, powerful buyers act to decrease a firms revenues. Indicators of the threat of buyers influence in an industry: Number if buyers is small Products sold to buyers are undifferentiated and standard Products sold to buyers are a significant percentage of a buyers final costs Buyers are not earning significant economic profits Buyers threaten backward vertical integration

Industry structure and environment Opportunities

Industry structure Opportunities

Fragmented industry Consolidation

Emerging industry First-mover advantage

Mature industry Product refinement Investment in service quality Process innovation

Declining industry LeadershipNiche HarvestDivestment

Opportunities in Fragmented Industries: Consolidation Fragmented industries are industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominant technologies. Most service industries, including retail fabrics, and commercial printing are fragmented industries.Industries can be fragmented for a variety of reasons: May have few barriers of entry = more small businesses to enter, Few economies of scale = encouraging small firms to stay small, Necessary close local control over enterprises to ensure quality The opportunity facing firms in fragmented industries is the implementation of consolidation strategies to become industry leaders. This can occur in several different ways: Discovering new economies of scale, Adopt new ownership structures.The benefits of implementing a consolidation strategy in a fragmented industry turn in the advantages larger firms in such industries gain from their larger market share.

Opportunities in Emerging Industries: First Movers Advantage Emerging industries are newly created or newly re-created industries formed by technological innovations, changes in demand, the emergence of new customer needs, etc. The opportunities that face firms fall into the general category of first mover advantages. First mover advantages are advantages that come to firms that make important strategic and technological decisions early in the development of an industry. First mover advantages can arise from 3 primary sources:1. Technological leadership, (through early investment in particular technologies. Two advantages: 1. Implementation may lead to a low-cost position based on their greater cumulative volume of production with a particular technology, 2. May obtain patent protections that enhance their performance. One group of researchers found that imitators can duplicate first movers patent-based advantages for about 65% of the first movers costs. ) 2. Pre-emption of strategically valuable assets, (first movers that move to tie up strategically valuable resources in an industry before their full value is widely understood can gain sustained competitive advantage. Firms that are able to acquire these resources have, in effect, erected formidable barriers to imitation in an industry. May include things like: raw materials, favourable geographic locations, and product market positions. )3. The creation of customer switching costs. (Customer switching costs exist when customers make investments in order to use a firms particular products or services. Can be found in industries like: personal computers, prescription pharmaceuticals, and groceries. )First-moving firms attempt to influence the evolution of an emerging industry, they use flexibility to resolve this uncertainity by delaying decisions until the economically correct path is clear and them moving quickly to take advantage of that path.

Opportunites in mature industries: product refinement, service, and process innovationOver time, as these new ways of doing business become widely understood, as technologies diffues through competitors, and as the rate of innovation in new products and technologies drops, an industry begins to enter the mature pahse of its development. Common characteristics of mature industries include: Slowly growth in total industry demand, Development of experienced repeat customers, Slowdown in creases in production capacity, Slowdown in the introduction of new products/services, Increase in the amount of international competition, and Overall reduction in the profitability of firms in the industry.Focus shifts from the development of new technologies and products to refining a firms current products, an emphasis on increasing the quality of service, and a focus on reducing manufacturing costs and increased quality through process innovations, Refining current products: industries like home detergents, motor oil, and kitchen appliances. Innovations in these industries focus on extending and improving current products and technologies. Emphasis on service: with limited abilities to invest, efforts ro differentiate products often turn towards the quality of customer service. A firm that is able to develop a reputation for high-quality customer service may be able to obtain superior performance even though its products are not highly differentiated. Process innovation: a firms processes are the activities it engages in to design, produce, and sell its products/services. It is a firms effort to refine and improve its current processes. Process innovations designed to reduce manufacturing costs, increase product quality, and streamline management become more important.

Evaluating a firms internal capabilities

This will be done through the model of resource-based view (RBV). Resources is defined as the intangible and tangible assets that a firm controls that it can use to conceive and implement its strategies. Capabilities are a subset of a firms resources and are defined as the tangible and intangible assets that enable a firm to take full advantage of the other resources it controls. (marketing skills, teamwork, and cooperation among its managers)A companys resources and capabilities can be classified into four broad categories: 1. Financial resources (retained earnings, profit, cash from entrepreneurs, equity holders, bondholders, and banks),2. Physical resources (plant equipment, location, access to raw materials etc),3. Individual resources (HR training, experience, judgement, intelligence, insight of individual managers and workers), and4. Organizations resources (formal reporting structure, formal and informal planning, controlling, and coordinating systems, culture and reputation).VRIO Framework: stands for four questions: value, rarity, limitability, and organization. Resource or capability in question

Valuable?Rare?Costly to imitate?Exploited by organization?Competitive implications / strengths or weaknesses

No - - NoDisadvantage = weakness

YesNo - Parity = strength

Yes Yes No Temporary advantage = Strength & distinctive competence

Yes Yes Yes Yes Sustained advantage = strength & sustainable distinctive competence

Value: does a resource enable a firm to exploit an environmental opportunity and/ or neutralize an environmental threat?If yes, then its resources/capabilities are valuable and can be considered strength. If no, then its a weakness. Or rather they are only valuable to the extent that they enable a firm to enhance its competitive position.

Rarity: is a resource currently controlled by only a small number of competing firms?If numerous completing firms control a particular resource or capability, then that resource is unlikely to be a source of competitive advantage for any one of them. Instead, valuable but common (not rare) resources and capabilities are sources of competitive parity. Only when numerous other firms do not control a resource is it likely to be source of competitive advantage. As long as the number of firms that possess a particular valuable resource or capability is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource or capability can be considered rare and a potential source of competitive advantage. Imitability: do firms without a resource face a cost disadvantage in obtaining or developing it?Valuable and rare organizational resources can be sources of sustained competitive advantage only if firms that do not possess them face a cost disadvantage in obtaining or developing them, compared to firms that already possess them. These kinds of resources are imperfectly imitable. 2 forms of imitation: Direct duplication, Substitution.Reasons as to why it may be costly to imitate another firms resource/capability: Unique historical conditions (first mover advantage and path dependence because of its low-cost access to resource due its place in time and space), Casual ambiguity (cannot tell what enables a firm to gain an advantage & based on complex sets of interrelated capabilites), Social complexity (interpersonal relationships, trust, culture, and other social resources that are costly to imitate in the short term), and Patents.Organization: are a firms other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resource? This can range from any unique business/corporate structure (aka formal reporting structure), management control systems (formal and informal), compensation policies, etc.

Product Differentiation:

Product differentiation is a business strategy where firms attempt to gain a competitive advantage by increasing the perceived value of their products/services relative to the perceived value to other firms product and services. Although firms often alter the objective properties of their products/services in order to implement a product differentiation strategy, the existence of product differentiation, in the end, is always a matter of customer perception. Products sold by two different firms may be very similar, but if customers believe the first is more valuable than the second, then the first product has a differentiation advantage. To differentiate its products, a firm can focus directly on the attributes of:its products/services: Product features, Product complexity, Timing of product introduction, Location.Or on relationships between itself and its customers: Product customization, Consumer marketing, Product reputation.Or on linkages within or between firms: Linkages among functions within a firm, Linkages with other firms, Product mix, Distribution channels, Service and support.