Gaining and Sustaining Competitive Advantage

1. Gaining and SustainingCompetitive Advantage Firm’ strategy should develop and exploit valuable, rare and costly-to-imitate resources, leading to sustained competitive advantage and above normal performance

2. Preliminaries • Strategy formulation, not implementation • No ‘silver bullet’, ‘magic formula’ • A bit of luck • Proactive vs. reactive

3. The Many Definitions of Strategy • …a firm’s theory about how to compete successfully. (J. Barney) • …the way to achieve organizational objectives. (Hatten & Hatten) • …commitments and actions designed to exploit core competencies and gain competitive advantage. (Hitt, Ireland & Hoskisson) • …a plan that specifies which choices (the player) will make in every possible situation. (Von Neumann & Morgenstern)

4. Strategy and Competitive Advantage • Competitive advantage - when strategy (1) is consistent with underlying economic processes, (2) creates value, and (3) is unique or rare. • Competitive parity - when strategy (1) is consistent with underlying economic processes, (2) creates value, but (3) is not unique or rare • Competitive disadvantage – when strategy fails to create economic value.

5. General Model of Strategic Management Company Profile( SWOT ) Mission Objectives Strategies Tactics Industry & Environmental Analysis ( SWOT )

6. General Model of Strategic Management • Mission - Fundamental purpose, how firm differs from its rivals • Objectives - Measurable performance targets, financial and/or strategic • Strategies – means, plans or commitments to achieve a firm’s mission and objectives • Tactics - Actions or policies to implement strategy • Company Profile – strengths and weaknesses of a firm • Environmental Analysis – opportunities, threats, characteristics and trends of the industry and society

7. Mission Statements • Benefits of having a mission statement • unanimity of purpose • employee motivation • culture / focal identity • allocating resources • Disadvantages of mission statement? • Improved performance? • Why don’t all companies have mission statements?

8. Typical Components of a Mission Statement • Primary market or technology • Goals: growth, profitability, survival • Basic beliefs, company philosophy • Public image, self-concept • Customers • Quality

9. Geisinger’s Mission Statement “Enhancing quality of life through an integrated health service organization based on a balanced program of patient care, education, research and community service.”

10. Nike’s Mission Statement “To bring inspiration and innovation to every athlete in the world.”

11. Southwest Airline’s Mission Statement ‘The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit”.

12. Dell’s Mission Statement Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of: • Highest quality • Leading technology • Competitive pricing • Individual and company accountability • Best-in-class service and support • Flexible customization capability • Superior corporate citizenship • Financial stability

13. UNLV’s Mission Statement The University of Nevada, Las Vegas, located in the vibrant and dynamic city of Las Vegas and surrounded by the Mojave Desert, is emerging as a premier urban university. UNLV’s development embraces the traditional values of higher education adapted for the global community of the 21st century. The university increasingly will concentrate its resources on programs that are student centered, demonstrably excellent, and responsive to the needs of the local and regional community. UNLV promotes an environment that encourages the full personal and professional development of those it serves and of those who serve the university. UNLV assists students in meeting the intellectual and ethical challenges of responsible citizenship and a full and productive life through opportunities to acquire the knowledge and common experiences that enhance critical thinking, leadership skills, aesthetic sensitivity, and social integrity. The university provides traditional and professional academic programs for a diverse student body and encourages innovative and interdisciplinary approaches to teaching, learning, and scholarship. Recognizing the individuality of each student, UNLV simultaneously engenders collegial relationships and a sense of community among its members. UNLV embraces the interdependence of quality instruction, scholarly pursuits, and substantive involvements in campus and community life. The university offers artistic, cultural, and technical resources and opportunities to the broadest possible community. It promotes research programs and creative activities by students and faculty that respond to the needs of an urban community in a desert environment. UNLV is committed to developing a synergy between professional and liberal studies, between undergraduate education and graduate programs, and between superior teaching and meaningful research. UNLV increasingly is a dynamic resource for, and partner with, the community that it serves.

14. Items Examined in the Company Profile The general strengths and weaknesses of a firm • Performance and Financial position • Leadership • Org. structure • Culture • Strategic issues by functional area • Value chain

15. Industry and Environmental Analysis Opportunities, threats, characteristics and trends of the industry and society • Industry characteristics analysis • Porter’s Five Forces Model • Stage of industry evolution • Stakeholder analysis • Environmental assessment • Competitor analysis

16. Setting Objectives • Purpose of setting Objectives is to: • convert mission into performance targets • create yardsticks to track performance • establish goals that require stretch • push firm to be inventive, focused

17. Setting Objectives • Set challenging but achievable objectives, but guard against: • Complacency • Drift • Internal confusion • Status quo performance • Financial and strategic objectives

18. Financial Objectives • Objectives that relate to improving firm’s financial performance • Examples • increase ROI from 15% to 20% • maintain AA bond rating • increase earnings growth from 10% to 15% • Other examples?

19. Strategic Objectives • Improvement in competitiveness or market position • Examples • Increase market share from 15% to 18% • Surpass rivals on customer service • Achieve lower cost than competitors • Achieve technological superiority • Other examples?

20. Types of Strategies • Business strategies (competitive) • Corporate strategies (alliances, M & A) • Porter’s generic strategies – “ …the general strategic orientation of the firm.” • Cost leadership • Differentiation • Focus or niche • Emergent strategies

21. Tactics • Actions to implement strategy • Policies and procedures to get line employees to follow the firm’s strategy • “Messy” issues of strategy implementation, not formulation

22. Measuring Performance Organizational performance is a complicated concept – multiple methods, each with different uses and flaws

23. Multiple Measures of Performance

24. Measures of How WellPresent Strategy is Working • “Performance Test” (Thompson & Strickland) • Strategy fits firm’s environment • Builds competitive advantage • Improves strategy performance measures • Common measures of strategy performance • Change in firm’s market share • Trend in profit margins relative to rivals or industry average • Composite measures of financial strength • Trend in firm’s stock price • Firm’s reputation with its customers • Product quality • Service quality • Employee satisfaction / morale

25. Accounting Measures of Performance:Liquidity Ratios

26. Accounting Measures of Performance:Solvency Ratios (Leverage)

27. Leverage Example

28. Accounting Measures of Performance:Funds Management / Activity Ratios

29. Accounting Measures of Performance:Profitability Ratios

30. Adjusted Accounting Measures of Performance • Return on invested capital (ROIC) • Economic profit (EP) • Market value added (MVA) • Tobin’s q Note: these measures can be difficult to compute and more appropriate to finance than strategy. Our interest is in developing an intuitive understanding – how they compare, contrast and can be used.

31. Return on Invested Capital • The return or profit a firm makes on the investment it has in its operations + current assets + fixed assets - net other assets (other assets – other liabilities) - non-interest bearing current liabilities (A.P.) Invested capital

32. Economic Profit • Reports, in dollar terms, the actual economic profit the firm made EP = Invested capital x (ROIC – WACC) note: ROIC and WACC are percentage terms. If the difference is positive, EP will also be positive.

33. Market Value Added • Measure that characterizes the long-term performance of a firm market value of equity + market value of debt - economic book value MVA note: this measure is also difficult to calculate, especially determining the amount invested in the firm since inception.

34. Tobin’s q • Ratio of a firm’s market value to replacement cost of its assets q = firm market value / firm book value where market value of common stock + market value of preferred stock + book value of short-term debt + book value of long=term debt firm market value

35. Make Meaningful Comparisons • Industry and sector data often readily available • Comparison with past performance • Stage of industry evolution • Benchmarking with competitors • US and industry averages • Industry success factors

36. Evaluating Environmental Threats A firm’s strategy should neutralize environmental threats.

37. General Model of Strategic Management Company Profile( SWOT ) Mission Objectives Strategies Tactics Industry & Environmental Analysis ( SWOT )

38. Evaluating Environmental Threats • Origins of the Structure – Conduct – Performance Model • Tools to evaluate environmental threats • Industry characteristics analysis • Stakeholder analysis • Porter’s Five Forces Model • Competitor analysis

39. The Structure – Conduct – Performance Model Number of competing firms, homogeneity of products, cost of entry and exit Industry Structure Price taking, product differentiation, tacit collusion, exploit market power FirmConduct Firm: above, normal, belowSociety: social welfare implications Performance

40. Type of Industry = Perfect Competition Large number of firms, homogeneous products,low cost of entry and exit Industry Structure Price taking FirmConduct Firm: normalSocial welfare: maximized Performance Industry Examples?

41. Type of Industry = Monopolistic Competition Large number of firms,heterogeneous products,low cost of entry and exit Industry Structure Cost leadership,Product differentiation FirmConduct Firm: above normalSocial welfare: less than perfect competition Performance Industry Examples?

42. Type of Industry = Oligopoly Small number of firms,costly entry and exit Industry Structure FirmConduct Many options, including collusion Firm: above normalSocial welfare: less than monopolistic competition Performance Industry Examples?

43. Type of Industry = Monopoly Only one competing firm,costly entry Industry Structure FirmConduct Uses market power to set prices Firm: above normalSocial welfare: less than oligopoly Performance Industry Examples?

44. Market size Market growth rate Number and size of rivals Scope of rivalry Number and size of buyers Number and size of suppliers Substitute products Ease of entry / exit Distribution channels Economies of scale Learning curve Capacity utilization Average industry profitability Pace of technological change Industry Characteristics Analysis

45. Stakeholder Analysis People or groups who have an interest, claim, or stake in how well the firm performs shareholders managers employees customers suppliers government unions community general public

46. Evaluating Environmental Threats:Porter’s Five Forces Model What determines the degree of industry competitionand profitability? Threat ofentry Threat of rivalry Threat ofsuppliers Industry profitability Threat of buyers Threat of substitutes

47. Porter’s Five Forces Model Barriers to Entry • Economies of scale • Product differentiation • Cost advantages independent of size (Technology, know-how, access to raw materials, geographic locations, learning curve) • Contrived deterrence • Government policy • Capital requirements * • Switching costs * • Access to distribution channels * * Some disagreement among scholars

48. Porter’s Five Forces Model Intensity of Rivalry • Many competitors • Similar in size • Slow rate of industry growth • Product lacks differentiation • Capacity added in large increments • High level of fixed costs • Exit barriers are high • Reputation or past history

49. Porter’s Five Forces Model Substitute Products • Products that appear to be different but satisfy the same need • Customer switching costs are low • good examples butter vs. margarine calculators vs. slide rules tape b/u vs. CD burner • bad examples Coke vs. Pepsi Honda vs. Toyota

50. Porter’s Five Forces Model Bargaining Power of Buyers/Customers • Small number of buyers • Purchase products that are standard or undifferentiated • Industry products represent a large share of buyer’s total cost • Unimportant to final quality of product • Product does not save the buyer money • Buyer may integrate backward