Final Exam Notes PDF

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Comprehensive notes for final exam - James Davis's class...

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STEEP ANALYSIS I.

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Levels/Layers in STEEP Analysis A. Red - Internal environment B. Grey - Macroenvironment 1. Broadest level of external - Large scale C. Blue - industry level 1. porter's 5 forces analysis. Helps understand relative attractiveness of industry D. Green - markets of similar buyer groups 1. Firms that compete more directly with each other 2. Markets with similar buyer groups 3. Competitor analysis, segmentation analysis STEEP Analysis A. Purpose: to help managers understand trends in order to minimize threats and leverage opportunities 1. Can affect industry and firm B. Structured way to account for trends and changes that are beyond the firm 1. May impact operations of the firm C. Interchangeable acronym is PEST analysis 1. P - political/legal 2. E - economical 3. S - sociocultural 4. T - technological a) Ecological left out on its own thing but can fall under any of the above (PEST) D. STEEP gives ethical its own category E. To strategically classify and monitor the macroeconomic environment More on STEEP A. Sociocultural - changing population demographics, changing values in society, changing lifestyles, changing tastes and preferences B. Technological - new discoveries, new product potential, new communications technology C. Economic - interest rates and inflation, consumer confidence, economic growth, unemployment levels, seasonality D. Ecological - consumer preferences, access to sustainable resources, environmental regulations and incentives E. Political/Legal - employment law, taxation, infusty and change regulations, monopoly/antitrust laws Steps for STEEP 1. For each letter, spend time brainstorming major trends, forces and changes 2. Identify and describe most salient trends under all categories 3. Examine these salient changes alongside each other. Identify

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interconnectivity 4. Forecast future direction 5. Attempt to derive implications for strategy for the firm using the changes What it can do A. Gives perspective on significant environmental issues that may impact firms competitiveness in the past or future B. Pushes managers to look beyond firms internal operations C. Firm in relation to environment Risks and limitations 1. Highly dependent on manager’s interpretation of most salient trends 2. Does Not provide way to access which issues will actually have most impact on the business 3. Different managers interpret different factors differently 4. Requires long term orientation. Many managers accessed short term performance. Beyond what managers are willing to consider

PORTER’S 5 FORCES I.

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Overview A. A basis to evaluate and understand an industry and its participants B. Allows managers to access the major factors impacting an industry’s profit potential and may help highlight how to gain competitive advantage Three things to note 1. Used at industry level in external environment 2. Strength of competitive pressure corresponds to the level of profitability in the industry 3. Level of competitive pressures allows us to understand how attractive the industry is Porter's 5 forces A. Threat of new entrance 1. How easy is it for new firms to enter the industry 2. Low barriers to entry a) Equates to high threat of new entrance 3. Threat increased by a) low economies of scale, low capital requirements, easy access to distribution channels, no gov policy, limited learning curve, limited patent and trademark protection 4. Lowers profitability of industry when threat of new entrants is high B. Threat of substitutes 1. Goods or services that perform functions similar to existing products or services. They are not classified as a competitor 2. Clearly define your industry so that you can easily distinguish between competitors and substitutes 3. Substitutes vs Competitors

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a) Substitute ex: substitute for bus is cycling 4. Threat increases with low switching costs, low price performance tradeoffs, and easy ability to substitute 5. Lowers profitability of industry if the threat of substitute is high C. Bargaining power of suppliers 1. Negotiating power of of suppliers increase with high supplier concentration, high switching costs to different suppliers, when suppliers forward integrates 2. Lowers profitability of industry when bargaining power high D. Bargaining power of buyers 1. Negotiating power increase with low buyer switching cost, increased information available to buyers, low product differentiation, and substitute available to buyers 2. Lowers profitability of industry when bargaining power high E. Threat of rivalry between competitors 1. The higher the intensity of rivalry, the lower the profitability of the industy 2. Characterized buy high exit buyers, high fixed cost to operate, low product differences, low switching cost for buyers Overall of five forces Define relevant industry Identify the players constituting each of 5 forces a. Try to segment Analyze underlying drivers of each force a. Which string Access overall industry structure Analyze recent and likely future changes for each force How can firm position itself within the 5 forces

Risks 1. Critics suggest it doesn't account for social political and a. Use PEST in conjunction 2. Underestimates resources and competencies 3. Designed to analyze individual business units. Overlook synergies between business units 4. Changes you attempt to make to the industry might also benefits others

Major insights 1. Highlights business competition os the struggle to capture value 2. 5 forces analysis highlights that firms are in competition to make profits 3. Collective strength of 5 forces determines average profitability of industry 4. Leverage 5 forces in the firms favor COMPETITOR ANALYSIS

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Purpose of competitor analysis A. to provide managers with complete picture of competitive landscape 1. strengths and weaknesses of current and future competitors B. Good competitor analysis provides firm with competitive advantage 1. Superior competitive positions can only be achieved with detailed knowledge of that industry’s players Proactive competitor profiling A. Series of detailed questions that reveal 1. Strategic weaknesses of competitors to exploit 2. Likely strategic responses by competitors in response to you 3. Make firm more agile in terms of anticipating future strategic moves 5 main components of competitor analysis A. Objectives 1. Competitors future goals and philosophies 2. What are management’s drivers B. Assumptions 1. What are the assumptions of competitors firms managers about themselves, their industry, changes etc C. Strategy 1. What are your competitor’s current strategies and how are they currently competing D. Capabilities and resources 1. What are competitors current strengths and weaknesses E. Response 1. What are your competitor’s likely responses 2. What is your competitors focus, what shifts will they make, what are thri blindpsots, what will they respond to your initiatives Process of carrying out competitive analysis A. Identify current and future competitors B. Gather intelligence on competitors 1. Source publicly available information C. Consolidate, analyze, and organize information 1. Ex: matrix, spider diagram, grid D. Summarize insights from analysis 1. Opportunities, gaps and threats E. Derive strategic implications for your firm F. Continue to monitor competitors over time 1. Things change Insights A. Clear picture of competitive landscape B. Can help inform business decisions and strategic choices C. Help identify underserved or oversaturated areas in the market 1. Opportunities and threats revealed

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D. Promotes competitor conscious culture within organizations Risks and limitations A. May prompt firms to become competitor obsessed B. Instituting copycat approach. People stop coming up with unique strategies and just copy the competitors C. Blind companies to new and innovative approaches beyond the competitors actions

SEGMENTATION ANALYSIS -

So that firm can effectively target specific segments

To achieve superior performance firms should 1. Identify segments of industry demand 2. Target specific segments demands 3. Develop specific strategies for each segment

1. Identify market and establish basis for segmenting market a. Look for means for achieving internal homogeneity b. Look for external heterogeneity i. Searching for process that minimizes differences between members of a segment while maximizing different between each segment Basis for establishing segments 5 step approach 1. Identifiable a. Extent to which managers can identify distinct groups within the market 2. Substantial a. Extent to which a segment (or group of customers) represents a sufficient size to be profitable 3. Accessible a. Can they reach the segment through promotion 4. Responsiveness a. Are they likely to respond 5. Actionable a. Do segments provide guidance for marketing decisions Which segments should the firm target? 1. Segment size and growth 2. Segment structural attractiveness 3. Firm objectives and resources 7 stage process for STP

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Identify market to be segmented Select basis for segmentation Profile segments characteristics Evaluate segment’s attractiveness Select segments to target Develop strategic position for each segment Deliver strategy to deliver your firm in those targeted segments

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What it answers Answers where do we play and how do we win which subsets of market most attractives Structured way to identify most attractive group Allows firm to lever its limited resources

Risks and limitations 1. Difficult to manage balance between becoming too niche or too broad 2. Most segments are never static. They change over time 3. No fucken clue bro VRIO ANALYSIS Identify resources and capability that can serve as competitive advantage 1. Valuable 2. Rare 3. Inimitable - difficult to imitate 4. Organized Foundations important before VRIO - Firms are bundles of resources - Intangible and tangible - Heterogeneous - Resources not perfectly mobile between firms - Competitive position: unique position of resources and capabilities If VRIO met, then than resource or capability can build sustainable competitive advantage advantage Identify things that can meet VRIO criteria 1. Does it add value a. Does it enable firm to exploit opportunities or expect threats 2. Does it increase perceived customer value a. Decrease price b. Increase differentiation

3. Rare - temporary competitive advantage 4. Costly to imitate if others can’t substitute it a. Imitation can occur by i. Duplicating ii. Providing comparable product or service - substitute b. Can be hard to imitate because: i. Historical condition ii. Causal ambiguity iii. Social complexity 5. Firm must organize policies, organizational structure etc in order to fully realize the benefits of the VRIO items Process for VRIO 1. Identify valuable resources or capabilities a. What activities lower cost of production without decreasing value b. Which increase perceived customer value i. Has company won award ii. Hard to access distribution channels iii. Do you have special relationship with supplier iv. Do you have brand reputation v. Do you have really good employees vi. Any strengths in comparison to rivals 2. Are these valuable resources actually rare a. How many other companies have same capabilities b. Can the resource be acquired in the market by rivals 3. Are these resources hard or costly to imitate a. Can others easily duplicate b. Can they easily develop something similar 4. Access if firm is organized to exploit these resources a. Does company have strategic management process in place b. Are there good rewards systems in place? c. Good management? 5. Using resource identified as the cornerstone for developing broader strategy a. Exploit and protect these Major insights 1. Allows you to focus on most valuable 2. Allows you to exploit true sources of competitive advantage 3. Integrative look that connects different ideas together Risks 1. Creases inward looking perspective of strategy 2. Static - carried out at one moment in time 3. Overlooks weaknesses and external environment SWOT ANALYSIS

Establishes strategic fit Identify how a firm might leverage strengths, take advantage of opportunities etc VRIO - strengths Value chain analysis - weaknesses STEEP, 5 forces, segmentation and competitor analysis - opportunities and threats I. II. III. IV.

Strengths - makes a firm more competitive than rivals, where the firm has superior resources or capabilities. Focus on internal factors Weaknesses - limitations that prevent firms from achieving strategic objectives. Focus on current internal factors Opportunities - favorable situation in an external environment that may place the firm in a favorable position. Can help leverage strengths to increase advantages Threats - unfavorable changes in external environment that erode firm’s ability to compete

Process 1. List and evaluate strengths, weaknesses, and opportunities & weaknesses 2. Analyze and rank factors within each category 3. Combine categories to identify actions that link the internal and external environment a. TOWS analysis - where you link x and y axis b. Y axis - internal strengths and weaknesses c. X axis - external threats and opportunities i. Maxi maxi strategy - strengths and opportunities ii. Mini maxi - weaknesses and opportunities 1. How to use opportunities to overcomes weaknesses iii. Maxi mini - strengths and threats 1. How to leverage strengths to minimize threats iv. Mini mini - weaknesses and threats 4. Look at all actions and options to inform overall decisions Insights - Organize large amounts of data - Simple and understandable - combines internal and external data - Prioritize issues that have greatest impact on firm - Simplicity of SWOT means anyone can use and understand Risks and limitations - Can be overly simple - can mask complexity - Can vary between managers and practitioners - Static and only provides snapshot of situation - Does Not identify key actions that you should take as a strategist or manager VERTICAL INTEGRATION

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Decision as to weather you make or buy A. Which assets to own or buy from other firms B. Famous ones - henry ford supply chain full thing Underlying theory A. Transaction cost economics 1. Oliver williamson B. Difficulty in writing a contract to manage a transaction 1. Specificity a) The more specific the assets involved, the greater the chance that one party might hold up b) Higher benefit for firm to own the asset / vertically integrate 2. Uncertainty a) The more uncertain the more difficult it is to write a contract, the higher the benefit of owning it 3. Frequency a) The higher the frequency, the greater the benefit of owning the resource / vertical integration Vertical value chain A. Raw materials to end consumer One of two broad forms A. Forward integration - purchasing downstream operator in supply chain 1. Moving toward consumers B. Backward integration - creating or purchasing an upstream supplier 1. Moving toward raw material side Core idea: two dimensions critical for vertical integration decisions A. How easy or difficult is it to write a contract B. How critical is the management to the creation of competitive advantage 1. Assess relative importance of resource to competitive advantage Two axis framework A. Falls below line - should be bought B. above line - should be made in house or vertically integrated (high importance to competitive advantage and has at least some difficulty to writing a contract) Stages to vertical integration decisions A. Lay out stages in business supply chain 1. Identify assets associated with each stage B. Identify participants of each stage C. Assess the ease to which contracts can be written 1. Frequency of transactions 2. Uncertainty of transactions 3. specificity of asset D. Assess extent to which different assets create competitive advantage E. Evaluate where resources within supply chain fall on the two dimensional

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framework 1. Degree of difficulty in writing contracts 2. Importance to competitive advantage axis F. Use framework to guide decision on what to integrate and what to buy or source Two major insights A. Systematic way to work through B. Allows for careful evaluation on what a firm should own or buy Risks and limitations of framework A. Depends on managers ability to categorize activities within supply chain B. Difficult to accurate evaluate weather or not the resource is actually important to competitive advantage or how hard it is to write contracts C. Tends to look at historic and current data rather than how it may play out in the future VERTICAL INTEGRATION A. When you are a manufacturer and decide to get trucks to deliver them too B. Process where steps in production of a product are controlled by a single company in order to increase that company’s power in the marketplace 1. Buying another step in the chain 2. Ex: Ford attempted to own all of their own supply chain even the raw materials like forests and plantations HORIZONTAL INTEGRATION A. Aka lateral integration B. When you buy other things that you already do business in 1. Buying someone that does the same thing already 2. Manufacturer buying more factories 3. Strategy to increase your market share by taking over a similar company. Ex: merger or buyout to increase your reach

Lego Problems - stick with plastic bricks or continue into new business lies - Make or manufacture - Running out of some products overflowing with others solution - outsource the manufacturing Plastic injection mold machine - something about the company lost its edge in supply chain

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