Introduction to Management

The higher the congruence among the elements, the greater the performance.

Fits and misfits can exist

• among different elements of the transformation process and strategy (“internal fit”)
• between strategy and environment (“external fit”)

1. Threat of new entrants
2. Bargaining Power of Buyers
3. Threat of substitute products or/and services
4. Bargaining Power of Suppliers
5. Rivalery among existing competitors

Basic question: should we enter, or stay in (if already entered), this ‘industry’?

• Diminishes profits as resources are devoted to price competition, advertising battles, increased customer service or warranties, etc.
• Rivalry intensifies with:
  • Number of competitors
  • Slow industry growth
  • Lack of differentiation or switching costs
  • Etc.

• Profits of established firms in the industry may be eroded by new competitors
• This threat is lower when barriers to entry are higher:
  • Economies of scale
  • Product differentiation
  • Access to distribution channels
  • Etc.

• Buyers can force down prices or bargain for higher quality or more services by playing competitors against each other
• When do buyers have this power?
  • Concentrated groups
  • Commodity products/services
  • Etc.

• Suppliers can threaten to raise prices or reduce quality of purchased goods/services
• When do suppliers have this power?
  • Concentrated groups
  • The supplier’s product is an important input to the buyer’s business
  • The supplier group’s products are differentiated or it has built up switching costs for the buyer
  • etc.

• Substitute products and services limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge
• The lower the price and the higher the performance of substitutes, the greater this threat

• Patent analysis (good for emerging technologies)
• 3-round Delphi Survey (re-adjustment of focus of investigation on industry-wide trends)
• Follow-up interviews with Experts

1. Identify symptoms (look for information)

2. Specify input (collect data concerning the environment and identify current strategy)

3. Identify output (which output is actually being achieved)

4. Identify problems (gaps between planned and actual output and identify problems)

5. Describe organizational components

6. Assess congruence (fit)

7. Generate hypothesis about problems (correlations between poor congruence and

problems that are affecting output)

8. Identify actions steps.

1. Environmental scanning

2. Environmental monitoring

3. Competitive intelligence

First part of environmental forecasting. Surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.

1. Listen - ask you customers questions about your products and services
2. Pay attention - read trade publications related to your industry
3. Follow trends online
4. Go old school - ask your customer what they think

Second part of environmental forecasting.  A firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities

Third and last part of environmental forecasting. A firm’s activities of collecting and interpreting data on competitors and identifying competitors’ strengths and weaknesses.

1. Environmental forecasting
   1. Environmental scanning
   2. Environmenta monitoring
   3. Competitive intelligence
2. Sceneario Analysis
3. SWOT Analysis

1. The General Environment

• PEST +DG
  • Political/legal
  • Economic
  • Socio-cultural
  • Technological
  • +Demographic
  • +Global

1. The Competitive Environment (Porters 5 forces)
   1. Threat of new entrants
   2. Bargaining power of buyers
   3. Bargaining power of suppliers
   4. Threat of substitutes
   5. Rivalery in the industry

Combination of two or more firms into one new legal entity

Benefits:

• obtain valuable resources that can help an organization expand its product offerings
• provide the opportunity for firms to attain 3 bases of synergy
  • leverging core competencies
  • sharing activities
  • building market power
• lead to consolidation within the industry, forces other players to merge
• enter new market segments

Limitations:

• takeover premiums pad for acquisitions are typically very high
• competing firms often can imitate any advantages or copy synergies that result from the merger or acquisition
• Manager's egos sometimes get in the way of sound business decisions
• cultural issues may doom the intended benefits from M&A endavours

Benefits

• Secure source of supply of raw materials
• Secure distribution channels
• Protection and control over assets and services
• access to new business opportunities and technologies
• simplified procurement and administrative procedures

Risks

• Expenses associated with increased overhead and capital expenditures
• Loss of flexibility resulting from inability to respond quickly to changes in the external environment
• Problems associated with unbalanced capacities or unfilled demand
• addition administrative costs

1. Overall cost leadership

2. Differentiation

3. Focus

and unfortunately: stuck in the middle

Business-level Strategy with an absolute cost advantage relative to its rivals.

=> lower the costs throughout the entire value chain
=> but assure same quality as your competitors, if you can't, it is not a sustainable strategy

According to Porter's value chain
Firm infrastructure: few mngtm layers (reduce overhead cost), standardized account practices
HRM: minimize employee turnover (effective policies), maximize porductivity (training programms)
Tech. Development: automated technology, expertise in process engineering (reduce manufacturing costs)
Procurment: ensure economies of scale and scope, shared purchasing within business units

Inbound logistitcs: effective layout
Operations: quality control, low cost locations
Outbound logistics: fleet mngmt
Marketing and Sales: purchase of media in large blocks, sales force by territory mngmt
Service: repair guidelines, minimize repeat maintenance

• Protection from competitors as a company is still earn returns even if its competitor eroded profits through intense rivalry.
• Low-cost position protects against powerful buyers: Price can only be driven down to the level of the next most efficient producer.
• More flexibility to cope with demands from powerful suppliers for input-cost increases.
• Low costs provide substantial entry barriers due to economies of scale.
• Favorable position with respect to new and substituting products

Too much focus on one or few value-chain activities.

- All rivals share a common input or raw material and therefore very vulnerable

to price increases in the factor of production.

- Strategy is easy to imitate.

- Lack of parity on differentiation

- Erosion of cost advantages when pricing information get available to

customers, heavily driven by the internet.

It's a business-level strategy with focus on uniqueness rather than price.

The firm must create products or services that are perceived industrywide unique and valued by customers. Emphasis on “nonprice” attributes for which customers are willing to pay a premium. 

Perception of product quality (design, engineering, manufacturing) can be strongly influenced by downstream activities in the value chain (marketing, sales, services).

According to Porter's value chain:
Firm infrastructure: superiors MIS, to integrate value-creating activities (improve quality)
HRM: attract talents, strong costumer orientation (provide trainings)
Tech. Developement: superior material handling, excellent applications, engineering support
Procurement: purchase of high-quality components, use of most prestigious outlets

Inbound logistics: superior material handling (reduced damages)
Operations: flexibility in responding to changes in manufacturing specs, low defect rates
Outbound logistics: accurate and responsive order processing
Marketing and Sales: innovative advertising, creat strong relationship to key costumers
Service: rapid response to costumer service request, complete inventory of replacement parts

• Protection against rivalry as brand loyalty lowers customer sensitivity to price and raises customers switching costs.
• Higher entry-barriers because of customer loyalty and uniqueness of product/service.
• Higher margins allow to deal better with supplier power. Supplier power is also reduced as there is prestige in supplying a producer of highly differentiated products.
• Reduced buyer-power as they lack comparable alternatives.
• Lower threat from substitutes due to customer loyalty

• Uniqueness that is not valuable. Only if customers value the differentiation, the strategy works.
• Too much differentiation. Companies strive for more differentiation than the customer desires. In that case the company gets vulnerable to rivals that meet the appropriate level of differentiation for a lower price.
• Too high a price premium. Customers may desire the product, but are repelled by the price premium.
• Differentiation that is easily imitated.
• Dilution of brand identification through product-line extensions. By adding lower price products or lower quality to their portfolio, companies erode their brand image.
• Perception of differentiation may vary between buyers and sellers. à“Beauty is in the eye of the beholder”.

Business-level strategy. The firm focuses towards narrow product line, buyer segment or geographic market within an industry. The firm must attain advantages either through differentiation or cost leadership in this specific target segment. Both variants rely on providing better service than broad-based competitors

• All firms following the focus-strategy also follow the approach of cost leadership or differentiation. These positions provided defenses against all the five forces (see chapter above).
• Focus is also used to select niches that are least vulnerable or where competitors are weakest.

• Erosion of cost advantages within the narrow segment as competitors gain experience with a company’s method or service.
• Even highly focused products or services can be subject to competition from new entrants and from imitation. One example here were many dot-com firms where entry-barriers are very low.
• Firms become too focused to satisfy buyers need and have too narrow a product or service. It then also very difficult for specialty firms to attain parity on costs with the big international chains with their “one-serves-it-all” products.
• Strategy is easy to imitate.
• Lack of parity on differentiation
• Erosion of cost advantages when pricing information get available to customers, heavily driven by the internet.

• Business-level: Competitive Advantage: How should we compete in a given industry?
• Corporate-level: Industry Attractiveness and Linkages across Businesses: Which industries should we be in? How do we derive advantage across businesses?

Four means of creating value:

• Leveraging core competencies

• sharing activities

• pooled negotiating power

• vertical integration

Diversification: the process of firms expanding their operations by entering new businesses.

Why? Synergies!