RSM392H1 Study Guide - Final Guide: Soltyrei, Vise, Confirmation Bias

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27 Jan 2013
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RSM392 Readings
1 | P a g e
What is Strategy By: Porter
Strategy is not operational effectiveness
Key to outperforming is to establish a difference that delivers greater
value
Differentiation arises from both choice of activities and how they are
preformed
Activities are basic units of competitive advantage
OE = performing similar activities better than rivals included but not
limited to efficiency *for superior profitability*
o Sources of differences in profitability among competitors b/c
they directly affect relative cost positions and levels of
differentiations
o When improves OE moves towards frontier cost capital to
improve performance
o Issue: easily copied as technology increases and companies catch up
o OE competition shifts curve outwards
o More benchmarking the more companies look alike copy each other‟s improvements which becomes a
cycle and a race down same path (ie no one can win)
o This is mutually destructive leads to diminishing returns
Strategic positioning = performing different activities from rivals‟ of performing similar activities in different ways
Performed Activity + Efficiency = Cost Advantage
o Performed Activity = Cost = Basic unit of competitive advantage
o Efficiency = choice of activity = differentiation
Strategy Rests on Unique Activities
Choosing a different set of activities to deliver a unique mix of value
Ex. Southwest air caters to price and convenience sensitive customers
Strategic positions emerges form 3 distinct sources
1. Variety Based Positioning = can be based on producing a subset of industry‟s product/services
2. Needs-based Positioning = that of serving most overall the needs of a particular group of customers
3. Access-based Positioning = segmenting customer who are accessible in different ways (ex. Old school theaters
for towns)
Positioning not only about carving out a niche
A Sustainable Strategic Position Requires Trade-offs
Strategic position not sustainable w/o tradeoffs
Trade-off arise b/c:
o Inconsistences in image or reputation
o Arise form activities themselves
o Limit on internal coordination and control
Fit Drives Both Competitive Advantage & Sustainability
Types of Fit
o First-order fit = simple consistency between each activity and overall strategy
o Second-order fit = activities are reinforcing
o Third-order fit = goes beyond activity reinforcement to optimization of effect
Fit & Sustainability
o Position built on systems of activities more sustainable than an activity
o Fit of activities creates pressure and incentive to improve operational effectiveness
o When activities complement each other, rivals get little benefit unless copy whole system
The inevitable result of frequent shifts in strategy, or of failure to choose a distinct position in the first place, is “me-
too” or hedged activity configurations, inconsistencies across functions, and organizational dissonance
Rediscovering Strategy
Failure to choose
o External changes
o Sound strategy, is undermined by a misguided view of competition, by organization failures, and especially
by desire to grow
o Management thinker that do not have to make tradeoffs
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RSM392 Readings
2 | P a g e
o Unnerved by forecasts of hypercompetition, managers more likely to likelihood of imitating everything
about competition
o Chase every new competition
o Pursuit of OE appealing b/c concrete and actionable
o Customer focus mistaken as serve all needs and wants from customers
The Growth Trap
o Compromise and inconsistencies in the pursuit of growth will erode the competitive advantage a company
had with its original varieties or target customers
o Attempts to compete in several ways creates confusion and undermine organizational motivation and focus
o Manager unable to make choice so broaden and compromise
o Cycle of OE and copying results in downsizing/merging
Profitable Growth
o Create stand-alone units each with its own brand name and tailored activities
o Company‟s activities more distinctive, strengthening fits, and communicating strategy better
The Role of Leadership
o Core strategy of management: defining and communicating the company‟s unique position making trade-
offs, and forgoing fit among activities
o Leader must provide the discipline to decide which industry changes and customer needs the company will
respond to, while avoiding organizational distraction and maintaining the company‟s distinctiveness
Company‟s choice of a new position must be driven by the ability to find new trade-offs and leverage a new system
of complementary activities into a sustainable advantage
The 5 Competitive Forces that Shape Strategy By: Porter
1. Barriers to Entry
Economies of Scale = larger firms can produce at lower cost per unit
o Lower number of firms and reduce competition
Proprietary Product Differences = characteristics that make a product appeal to a large market segment
o Only those characteristics that cannot be copied at low cost by competitors will be a barrier to
entry
Brand Identity = extent to which buyers will take the brand name into account when making purchase
decisions
Capital Requirements = total cost of acquiring the plant and equipment necessary to begin operating in
the industry
2. Bargaining Power of Suppliers
Differentiation of Inputs = different suppliers provide different inputs characteristic for input that
basically do the same job
o Greater degree of differentiation among suppliers the more bargaining power suppliers have
Presence & Availability of Substitute Inputs = extent to which it is possible to switch to another
supplier for an input
o Greater number and closeness of substitute input the lower the bargaining power of supplier
Supplier Concentration = degree of competitor among suppliers
o More concentrated the industry, fewer supplier and more control suppliers have over prices
they charge
o Greater supplier concentration means greater supplier bargaining power
Cost Relative to Total Purchase in Industry = amount you firm spends on inputs from a particular
supplier compare to the total revenue of all firms in the supplier industry
o Lowe expenditure implies more bargaining power for supplier
o Buyer‟s bargaining power falls as spending with a particular firm falls
3. Threat of Substitutes
Relative Price Performance of Substitutes = price of substitutes for your output compared to the price
you are charging
o If the price of substitutes is lower, the competitive threat increases as the price differential
increases
o Switching costs = cost to the buyer of switching from one seller to another
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o The greater the switching costs the lower the threat of substitutes because buyers have a
stronger incentive to stick with a single supplier
Buyer Propensity to Substitute = the extent to which buyers are willing to consider other suppliers
4. Bargaining Power of Buyers
Buyer Concentration Versus Firm Concentration = the extent of concentration in the buyer‟s industry
compared to the extent of concentration in your industry
o More concentrated the buyer‟s industry relative to your industry the greater the bargaining
power of buyers
Buyer Volume =number of units of your product the buyer purchases from all sources
o Greater buyer volume compared to the quantity purchased from you, the greater the
bargaining power of buyers
Buyer Information = state of information buyers have about your industry
o More information buyers have about your industry the more bargaining power buyers have
Substitute Products = number and closeness of substitutes available for your product.
o Greater the number of available substitutes the more bargaining power buyers have
Price of your Product Relative to Total Expenditures on all Products = the fraction of total expenditure
buyers spend on your products
o Greater the fraction of total expenditure the greater the price elasticity of demand and the
more bargaining power buyers have
Product differences = degree of differentiation between your product and other products in the market.
o Greater the differentiation of your product, the lower its price elasticity of demand and the
less bargaining power buyers have
Brand identity is the extent to which your brand name is recognized and sought out by buyers
o The stronger your brand identity the less bargaining power buyers have
5. Rivalry Determinates
Degree to which rivalry drives down an industry‟s profit potential depends on intensity and basis
Industry growth = speed at which the market is growing
o Rapidly growing markets provide less incentive for firms to aggressively compete with each
other
Intermittent overcapacity = amount demand fluctuates during a year (or over a business cycle) and the
impact lower demand has on how efficiently the firm is able to use its plant and equipment
o In some industries a decrease in demand leads to significant idle productive capacity, while
other industries are not as susceptible to this factor
o More intense rivalry is likely to be fostered in an industry in which firms face either large
amounts of unused plant capacity or face frequent idle capacity
Concentration and balance is the number of firms in the industry and their relative size
o An industry in which a few firms supply most of the output is likely to not be very
competitive because the large firms will control the market
Porter’s 5 Description of Industries
1. Fragmented (ex. Shore repairs, gift shops)
2. Emerging (ex. Space Travel)
3. Mature (ex. Automotive)
4. Declining (ex. Solid Fuels)
5. Global (ex. Microprocessors)
Creating Competitive Advantage By: Ghemawat &
Rivkin
Difference in industry structure and customer affect
profits
Ex. Pharmaceutical little rivalry b/c patent,
differentiation, large demand, little labour power
from unions
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