MQM485: Activities for Today

1. MQM485: Activities for Today • Attendance • Unanswered Questions from Last Class • Discussion Chapter 5 (Hitt) Fast-Cycle Capability for Competitive Power Case: The Ford Pinto Break Chapter 10 (Hitt) Why be Honest if Honesty Doesn’t Pay Current Event Presentations Simulation Decision 4

2. Themes Related to Chapter 5 • Fast Cycle Capability • How to attack established competitors • How to defend competitive positions • Good versus Bad Competitors • First mover advantage?

3. Dynamic View of Strategy • Strategic Actions are Relative • Outcomes of Strategic Actions are Interactive • For a successful strategy to evolve we need we to project long term trends & trajectories of competitive maneuvers • Firm Performance is also a function of Market Competitive Dynamics

4. Exploitation Counterattack Launch Gradual Erosion of a Sustained Competitive Advantage Returns from a Sustained Competitive Advantage Time (years) 10

5. Disrupting the Status Quo 1 Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety Creating Temporary Advantage 2 Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers Seizing the Initiative 3 Move aggressively into new areas of competition to create new advantage and undermine a competitor’s old advantage 4 Sustaining the Momentum Take several actions in a row in order to seize the initiative and create momentum to develop new advantages Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative

6. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Exploitation Counterattack Launch 5 10 15 Time (years)

7. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Firm has already moved on to Advantage No. 2 Exploitation Counterattack Launch 5 10 15 Time (years)

8. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Firm continues to move on to the next Advantage Exploitation Counterattack Launch 5 10 15 Time (years)

9. Instructors Note • The following slides (about 8 slides) do not necessarily come from chapter 5. • I have picked them from several sources which I can share with you -- if you are interested. • They are related to concepts discussed in the chapter – I will spending most of class time on this slides.

10. Judo Strategy by Yoffie/Cusumano • Principle # 1: • Move to uncontested ground to avoid head to head conflict. • Principle # 2: • Be flexible and give away attacked directly by superior force. • Principle # 3” • Exploit leverage that uses the weight and strength of opponents against them.

11. Three Important Conditions for Attacking an Industry Leader • A sustainable competitive advantage • Proximity in other activities • Some Impediment to leader retaliation • E.g. Coke Vs Gallo

12. Avenues for Attacking Leaders • Reconfiguration - Innovation in the way value activities are performed. • Product Changes • Superior performance or design (P&G vs. Scotts) • Low cost product design (Canon) • Logistics • Efficient logistics system (Wal-Mart) • After sales support (Vetco) • Order processing/delivery (Amazon) • Marketing • Increased spending on an under marketed activity (Grey Poupon) • New positioning (Stouffer’s) • New Sales Organization (Customized approaches)

13. Avenues for Attacking Leaders • Reconfiguration - Innovation in the way value activities are performed. • Operations • Use the new or modified technology (Ore-Ida) • Downstream Configuration • Pioneer a new channel (Timex) • Preempt an emerging channel (Oil of Olay) • Go Direct (YKK)

14. Avenues for Attacking Leaders • Redefinition - Redefining the scope of competition Buyer Focus – Extended Stay America Product Focus – Savin Channel Focus – Skil • Horizontal Strategy • Broadening the Basis of Competition - Honda

15. Impediments to Leader Retaliation • Mixed Motives • High Leader Response Costs • Different Financial Priorities • Blind Spots • Gentlemen's Game

16. Signals to Look For • Discontinuous Technological Change • Buyer Changes • Changing Channels • Shifting Input Costs or Quality • Unhappy Buyers • Leader “stuck in the middle” • Very High Profitability

17. How to Defend Competitive Positions • Intensity of Retaliation • Block logical entry routes • Crowd Distribution Channels • Make Private Label Goods • Moving Target • Deterrence Mode • Who are potential entrants • What are potential avenues • Build Defensive tactics • Entry Barriers/Market Signals/Price Competition CAVET: SHORT TERM PROFITABILITY

18. Are ALL Competitors Bad? • Good Vs Bad • Motives • Diversified Companies • Value comparison • No need to defend pricing • Focus Competitors • Absorb Demand Changes

19. Name the Pioneer • Credit Card • Photo Copier • Disposable Diaper • VCR • Light Beer • De-Caff Cola • Fax Machine • Spreadsheet • Word Processing Software • Microwave Oven • Athletic Shoe • Camcorder • PC

20. Why did First Mover’s Fail? • Cost of Pioneering • Skills need to succeed are very different in growing and mature markets • Slow acceptance • Product Too Crude • Could not last long enough to be successful in the growth stage

21. When did first movers succeed? • Well thought out/superior product • Low entry cost • Premium price • Short pay-back • No opposition • How quick market support was received

22. Performance Operating characteristics Features Important special characteristics Flexibility Meeting operating specifications over time Durability Amount of use before performance deteriorates Conformance Match with pre-established standards Serviceability Ease and speed of repair or normal service Aesthetics How a product looks and feels Perceived quality Subjective assessment of characteristics (product image) Quality Dimensions of Goods & Services Product Quality Dimensions:

23. Timeliness Performed in promised period of time Courtesy Performed cheerfully Consistency Giving all customers similar experiences Convenience Accessibility to customers Completeness Fully serviced, as required Accuracy Performed correctly each time Quality Dimensions of Goods & Services Service Quality Dimensions:

24. The Ford Pinto • Discussion Questions

25. Ethics Moral standards, not governed by law, that focus on the human consequences of behavior Basic Concerns: • What it means to be a “Good Person” • Rules Which Guide Right or Wrong

26. Four Views of Ethical Behavior.

27. Why be honest if honesty doesn’t pay?- Bhide & Stevenson • Briefly elaborate reasons as to why you think we (as individuals) are honest (or at least agree honesty is the best policy) when there seem to be “anecdotal” evidence that honesty does not pay?

28. Corporate Social Responsibility • The sense of obligation to include social criteria in strategic decision making. • Pro: • It is the right way for a firm to behave. • Economic actions have social consequences. • Social behavior affects the firm’s market value. • Con: • A firm’s primary obligation is to maximize profits for its stakeholders in open competition.

29. Classical View E.g. Friedman Primary Responsibility is the maximize shareholder wealth Why should shareholders, workers, customers pay for this? Market mechanism will fail Outcome could result in a socially stratified society. Don’t rise the price of goods claiming to be responsible Socio-Economic View E.g., Bowman Maximize business and social returns in the long run Society allows business to flourish because of the “potential for overall social good” not for few to make money. Better than government regulation Irresponsible companies become “high risk” investments. Social Responsibility

30. Corporate Governance Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations Concerned with identifying ways to ensure that strategic decisions are made effectively Used in corporations to establish order between the firm’s owners and its top-level managers

31. Basis of the modern corporation Shareholders purchase stock, becoming Residual Claimants - Shareholders reduce risk efficiently by holding diversified portfolios Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks - Risk bearing by shareholders - Strategy development and decision-making by managers Separation of Ownership and Managerial Control

32. Agency Relationship Shareholders (Principals) Risk Bearing Specialist (Principal) Hire Managerial Decision-Making Specialist (Agent) Firm Owners Managers (Agents) which creates Decision Makers Agency Theory An agency relationship exists when:

33. The Agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Example:Overdiversification because increased product diversification leads to lower employment risk for managers and greater compensation Agency Theory Solution: Principals engage in incentive-based performance contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market to mitigate the agency problem

34. Shareholder (Business) Risk Profile Managerial (Employment) Risk Profile S M A Related Linked Dominant Business Related Constrained B Unrelated Businesses Manager and Shareholder Risk and Diversification Risk Level of Diversification

35. Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and and inefficient to monitor management’s behavior However, Boards of Directors are often accused of being lax in performing this function Agency Theory Example:Boards of Directors have a fiduciary duty to shareholders to monitor management

36. Ownership Concentration Boards of Directors Executive Compensation Multidivisional Organizational Structure Market for Corporate Control Governance Mechanisms

37. Large block shareholders have a strong incentive to monitor management closely Their large stakes make it worth their while to spend time, effort and expense to monitor closely They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats) Governance Mechanisms Ownership Concentration

38. Insiders The firm’s CEO and other top-level managers Related Outsiders Individuals not involved with day-to-day operations, but who have a relationship with the company Outsiders Individuals who are independent of the firm’s day-to-day operations and other relationships Governance Mechanisms Board of Directors

39. Increase diversity of board members backgrounds Strengthen internal management and accounting control systems Establish formal processes for evaluation of the board’s performance Governance Mechanisms Board of Directors Recommendations for more effective Board Governance:

40. Salary, Bonuses, Long term incentive compensation Executive decisions are complex and non-routine Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes In addition, stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the “right” decisions, but they do increase the likelihood that managers will do the things for which they are rewarded Governance Mechanisms Executive Compensation

41. Designed to control managerial opportunism Corporate office and Board monitor managers’ strategic decisions Increased managerial interest in wealth maximization M-form structure does not necessarily limit corporate-level managers’ self-serving actions May lead to greater rather than less diversification Broadly diversified product lines makes it difficult for top-level managers to evaluate the strategic decisions of divisional managers Governance Mechanisms Multidivisional Organizational Structure

42. Operates when firms face the risk of takeover when they are operated inefficiently The 1980s saw active market for corporate control, largely as a result of available pools of capital (junk bonds) Many firms began to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers was relatively small Changes in regulations have made hostile takeovers difficult Acts as an important source of discipline over managerial incompetence and waste Governance Mechanisms Market for Corporate Control

43. Owner and manager are often the same in private firms Public firms often have a dominant shareholder too, frequently a bank Medium to large firms have a two-tiered board Vorstand monitors and controls managerial decisions Aufsichtsrat selects the Vorstand Employees, union members and shareholders appoint members to the Aufsichtsrat Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing International Corporate Governance Germany

44. Obligation, “family” and consensus are important factors Banks (especially “main bank”) are highly influential with firm’s managers Keiretsus are strongly interrelated groups of firms tied together by cross-shareholdings Other characteristics: Powerful government intervention Close relationships between firms and government sectors Passive and stable shareholders who exert little control Virtual absence of external market for corporate control International Corporate Governance Japan

45. It is important to serve the interests of multiple stakeholder groups Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups Although controversial, some believe that ethically responsible firms should introduce governance mechanisms which serve all stakeholders’ interests Corporate Governance and Ethical Behavior

46. Reading for Next Class EXAM 1