Strategic Management

Value - Price - Cost-Model

• Firm A enjoys a competitive advantage, over rivals B and C because it can either
  • Attract buyers due to better surplus offered by its products (V-P)
  • Make a higher profit (P-C)
  • A combination of 1. and 2

Part of the VRIO framework, I, Imitability

• unique historical positions
• causal ambiguity: (competitor is not able to analyze the factors that lead to the competitive advantage of an innovative firm
• social complexity: source for imitability is interpersonal relationship, culture, ...
• Patents

1. Capturing & Locating
2. Sharing
3. Creating

• Tacit to Tacit (Socialization): Social interaction as tacit to tacit knowledge transfer, sharing tacit knowledge face-to-face or through experiences.
• Tacit to Explicit (Externalization): concepts, images, and written documents can support this kind of interaction. When tacit knowledge is made explicit, knowledge is crystallized, thus allowing it to be shared by others, and it becomes the basis of new knowledge.
• Explicit to Explicit (Combination): Combination (organizing, integrating knowledge), combining different types of explicit knowledge, for example building prototypes
• Explicit to Tacit (Internalization): knowledge receiving and application by an individual, enclosed by learning by doing

individual <=> social

explicit <=> tacit.

Combinative capabiliteis => value: The use andcombination of existingknowledge in order toinnovate

Integrative capabilities => cost: The integration ofspecialized knowledgealong the productionprocess

Protective capabilities => returns appropriation: The protection of thefirm’s knowledge, eg. Patents or Golden Handcuffs

=> economic performance

• Trade-off with other potentially valuable barriers (eg. product differentiation)
• Technological change may penalize the large-scale fimr if their produciion is more specialized
• Commitment to achiev ecnomies of sclae by using existing technology may prevent investments in new technologies

• The barrier can be nullfiled with new technologies and experience curves
• Pursuit of low cost through experience may involve trade-offs with other barriers (eg. product differentiation)
• If more than one fiirm erects entry barriers through experience curve, the consequences for one or more of them can be fatal
• Aggressive pursuit of cost declines through experience may draw attention away from market developments

• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Distribution channels
• Cost disadvantage
• Government policies

• Cost of strategic change
• Organizational inertia
• Uncertain replication of strategic initiatives
• Difficulty of imitating intangible assets

Phase 1: fluid pattern, high rate of innovation for products

Phase 2: transitional pattern: maximum for process innovation, rapid decline of product innovation

Phase 3: specific pattern

Private model:

• Innovation supported by private investments and private return appropriation

• Innovation encouraged through intellectual property protection

• Free-revealing and uncompensated knowledge spill-over reduce innovators profits

• Monopoly control granted to innovators represents a loss to society relative to free use by all of knowledge created

=> Property rights are important!

Collective model

• Provision for public goods (non-excludable and non-rival)

• Innovation encouraged through monetary, reputational or other subsidy

• Free rider problem a threat to continuous innovation

• Innovator relinquish control of knowledge produced, avoids social loss problem

Compound or private-collective model:

• Developers use private resources to privately invest in innovation and they reveal the innovation

• Innovation encouraged by private use and collective improvement

• Free rider problem mediated by private rewards from collective innovation

• Innovator relinquish control of knowledge produced, avoids social loss problem

• Benefits from network effects not available to free riders:

  • Innovators gain private benefits due to free revealing if and as such free revealing causes innovations to be diffused widely

  • Private benefits from community participation not available to free riders

• combinative capabilities (creating) → value
  Through combining information and knowledge, market opportunities can be catched up which generates value (innovation)

• integrative capabilities (transferring) → cost
  Productions needs coordinate efforts of specialists, efficiency is achieved by effective integration while minimizing knowledge transfer through cross-learning by organisational members. Transferring knowledge is not an efficient approach.

  • Rules and directives regulation communications between experts

  • Sequencing

  • Routines

  • Group problem solving and decisions making routines

• protective capabilities (managing) → returns appropriation
  Protection of the firm’s knowledge
  Against imitation: IP (patents, copyright, trade secrets
  Incentive alignment
  Employment
  Reordering rewards (golden handcuffs)

1950: financial planning

1960: Long ange planning, for growth and resource allocation

1970: Strategic planning, response to markets, alternative strategies

1980: Strategic Management strategic porcesses, competititve positioning

1990: Quest for strategic advantage, capabilities, resources

2000: New economy, business models, disruptive techonologies

2010: corporate social responsibility, business ethics, global strategies, sustainability / green strategies, competing for standards

Competitive strategy is concerned with creating and maintaining a competititve advantage in each and every area of business.

1. Competititve disadvantage (value-destroying strategy)
2. Competitive parity (firm and its competitiros are implemeting the same value-creating strategies)
3. Temporary advantage (firm is alone implementing a value crating strategy, but competitiros might prepare for imitation
4. Sustainable competitive advantage (firm is alone implementing a value crating strategy and competitors are unable to duplicate the benefits of this strategy)

1. Size differences and ecnomies of scale
2. Experience differences, learning-economie
3. Differential low-cost access to factors of production (Bargaining power)
4. Technological advantage independent of scale
5. Policy choices (within the firm)

1. Product features
2. Linkages between functions and complexity
3. Time (first mover
4. Location and presence
5. Product mix, mix with services
6. Links with other firms
7. Reputation

Model to understand relationship between a firm's environment, firm's behavior, firm's performance.

• Indsutry Structure: Industry structure (No. of buyers/sellers, product differentiation, barriers to entry, cost structures, vertical integration.
• Firm Conduct: Pricing behavior, product strategy, advertisting, R&D, investments
• Performance: performance of the ecnomoy as a whole and the firm, level of employment and progress.

• Industry competitiors
• potential of new entrants
• substitutes
• bargaining power of suppliers
• bargaining power of buyers

Limits: stable conditions, static perspective, no collaboration, only competition, non-market forces such as government policy are not taking into account

Can be viewed as a collective capital good, generating joint profits for the going firms. Connected to porters 5 forces

1. economies of scale
2. product differentiation (new entrants must spend heavily to overcome eisting customer loyalty)
3. capital requirements
4. switching costs
5. distribution channels
6. cost disadvantage (proprietary product technology, favorable acces to raw materials, favorable locations, government subsidies, learning and experience curve)
7. Government policies

Indicator of intensity of competition

\(HHI=\sum^N_{i=1}\frac{x_i}{\sum^N_{j=1}x_j}\)

Sum of squared market shares (normally of the 50 largest firms)

0: huge number of very small firms, 1: perfect monopoly

To measure intesity of competition

CR4=(sales of 4 largest firms) / (total industry sales)

Porters 5 forces.

1. numerous and equally balanced competitiros
2. slow industry growth
3. high fixed costs
4. lack of differentiation or switching ocsts (product or service is perceived as a commodity)
5. capacity increase
6. diversity of competitiros
7. high strategic stakes
8. high exit barriers (eg. specialised assets, fixed cost of exit, strategic interrelationships, emotional barriers, government and social restrictions

Porter fice forces

• switching costs are low
• substitute product's price is lower
• subsitute's product quality and performance is equal or greater

• more concentrated than the industry it sells to
• not obliged to cntend with other substitute products for sale to the industry
• industry is not an important customer of the supplier grouo
• suppliers' products are important inputs to the buyers business
• products are differentiaed and/or there are high switching costs
• suppliers can integrate forward into the industry

• purchases large volumes relative to totale sales of incumbent firms
• products pruchased represent a significant share of buyer's costs or spending
• products are undifferentiated
• low switching costs
• low profits
• buyers pose a credible threat of backward integration
• product unimportant to the buyer's own business
• buyers has full information