Strategic Management and Competitive Advantage for Small Businesses

Posted on Dec 18, 2024 in Economy

Chapter 1: What Is Strategy and the Management Process of Small Businesses?

Definition of Strategy

  • A theory about how to gain competitive advantages.
  • Example: Eisner’s strategy of extraordinary entertainment to attract premium pricing.

Strategic Management Process

  1. Mission & Objectives
    • Mission: Purpose of the firm.
    • Objectives: Specific, measurable targets to achieve the mission.
  2. External and Internal Analysis
    • External: Examines market trends, competition, and economic factors.
    • Internal: Assesses resources like human and technological assets.
  3. Strategic Choice
    • Selects strategies based on analysis.
  4. Implementation
    • Involves organizational structure, roles, and resource allocation.
  5. Achieving Competitive Advantage
    • Competitive advantage: Creating more economic value than competitors through differentiation or cost leadership.

Types of Competitive Advantages

  • Preference-Based: Consumers prefer a firm’s offerings (e.g., Nordstrom).
  • Cost-Based: Lower costs than competitors (e.g., Walmart).

Chapter 2: Evaluating a Firm’s External Environment

Why External Analysis Matters

  • Identifies threats and opportunities.
  • Informs strategic decisions for long-term profitability.

The Structure-Conduct-Performance (S-C-P) Model

  • Suggests industry structure influences competitive choices and profitability.

Five Environmental Threats

  1. New Entrants
    • High barriers reduce competition. Examples: economies of scale, brand loyalty.
  2. Existing Competitors
    • Threat increases with slow growth and high fixed costs.
  3. Suppliers’ Power
    • Strong suppliers can demand higher prices.
  4. Buyers’ Power
    • Buyers can influence prices and demand better services.
  5. Substitutes
    • Alternative products limit industry growth.

Complementors

  • Enhance product value when combined (e.g., Michelin tires on luxury cars).

Generic Industry Structures

  1. Fragmented: Many small firms; opportunities in consolidation.
  2. Emerging: New markets; first-mover advantages.
  3. Mature: Slowing growth; focus on process innovation.
  4. Declining: Market exits; opportunities in niche leadership.

Chapter 3: Evaluating a Firm’s Internal Capabilities

Resource-Based View (RBV)

  • Competitive advantage arises from firm-specific resources and capabilities.

Key Concepts

  1. Resources
    • Tangible: Equipment, cash.
    • Intangible: Reputation, brand.
  2. Capabilities
    • Skills that leverage resources (e.g., marketing expertise).

Two RBV Assumptions

  1. Resource Heterogeneity: Firms possess unique resource bundles.
  2. Resource Immobility: Some resources are difficult to replicate.

The VRIO Framework

  1. Value: Resource increases revenues or reduces costs.
  2. Rarity: Limited availability of the resource.
  3. Imitability: High cost for competitors to imitate.
  4. Organization: Effective use of resources through structure and controls.

Competitive Advantage Scenarios

  • Valuable + Rare + Costly to Imitate + Organized → Sustained Competitive Advantage.
  • Lacking one or more VRIO elements → Temporary Advantage or Parity.

1. Cost Leadership (Chapter 4)

Definition

  • Business strategy aimed at generating economic value by lowering costs below competitors.

Sources of Cost Advantage

  1. Economies of Scale: Reduced per-unit cost with increased output.
  2. Diseconomies of Scale: Avoiding inefficiencies from over-expansion.
  3. Learning Curve: Efficiency improves with experience.
  4. Access to Inputs: Favorable access due to history, location, or exclusivity.
  5. Technology: Leveraging unique or proprietary tech.
  6. Policy Choices: Streamlining processes and incentivizing cost-saving behaviors.

Implementation Tools

  • Organizational Structure: Functional or simple structures.
  • Management Controls: Budgeting, spending policies, informal culture.
  • Compensation: Bonuses, cost-reduction incentives.

VRIO Framework

  • Valuable, Rare, Inimitable, and Organized factors lead to competitive advantage.

2. Product Differentiation (Chapter 5)

Definition

  • Strategy to create customer preference by offering unique product attributes or experiences.

Bases of Differentiation

  1. Product Attributes: Features, complexity, location, timing.
  2. Firm-Customer Relationships: Customization, marketing, reputation.
  3. Firm Linkages: Synergies within the firm or with partners.

Economic Value

  • Allows premium pricing or higher sales volume by addressing unique customer needs.

Implementation Tools

  • Organizational Structure: U-form with cross-functional teams.
  • Management Controls: Encouraging creativity and flexibility.
  • Compensation Policies: Rewards for risk-taking, creativity, collaboration.

VRIO Framework

  • Differentiation strategies must meet VRIO criteria for competitive advantage.

3. Vertical Integration (Chapter 8)

Definition

  • Extending firm operations into upstream (suppliers) or downstream (distributors) activities.

Benefits

  1. Reducing Opportunism: Internalizing transactions to lower risks.
  2. Leveraging Capabilities: Using resources across integrated activities.
  3. Exploiting Flexibility: Adjusting quickly to uncertainty (less flexible than markets).

Implementation Tools

  • Organizational Structure: Functional (U-Form).
  • Management Controls: Budgets, integration efforts.
  • Compensation Policies: Incentives aligned with value chain objectives.

VRIO Framework

  • Integration creates competitive advantage when it meets VRIO conditions.

Caution

  • Over-integration can lead to inefficiencies and high costs.

Combined Strategies

  • Cost Leadership & Differentiation: Difficult but possible when certain factors support both (e.g., Toyota).

Corporate Diversification (Chapter 9)

  1. Types of Diversification:
    • Product Diversification: Operating in multiple industries.
    • Geographic Diversification: Operating in multiple geographic markets.
    • Product-Market Diversification: Combines both product and geographic diversification.
  2. Specific Diversification Types:
    • Limited: Single business (>95% of sales) or dominant business (70-95% of sales).
    • Related: Constrained (all businesses related) or linked (some businesses related).
    • Unrelated: No relationship between businesses.
  3. Value Creation Criteria:
    • Must generate economies of scope.
    • The firm must have a cost advantage over external equity holders.
  4. Economies of Scope:
    • Operational: Sharing activities, spreading core competencies.
    • Financial: Internal capital markets, risk reduction, tax advantages.
    • Anticompetitive: Multipoint competition, market power.
    • Managerialism: Benefits to managers (e.g., higher compensation).
  5. VRIO Framework for Competitive Advantage:
    • Valuable, Rare, costly to Imitate, and Organized to exploit.
  6. Imitability:
    • Economies of scope vary in how easy they are to imitate (e.g., tax advantages = easier; market power = harder).

Organizing to Implement Diversification (Chapter 10)

  1. M-Form (Multidivisional) Structure:
    • Divides the firm into semi-autonomous divisions.
    • Key roles:
      • Board of Directors: Governance and oversight.
      • Senior Executives: Strategic decision-making.
      • Divisional Managers: Operational control.
      • Shared Activity Managers: Optimize synergies across divisions.
  2. Key Management Processes:
    • Measuring Performance: Accounting metrics, Economic Value Added (EVA).
    • Allocating Capital: Zero-based budgeting to prevent biases.
    • Transferring Products: Pricing decisions (negotiation, cost-based, market-based).
  3. Compensation Policies:
    • Align employee incentives with organizational goals.
    • Compensation committees must ensure performance-linked rewards.
  4. Refocusing Strategy:
    • Exit businesses when:
      • Economies of scope are absent.
      • Core activities need more resources.

Value Chain Analysis (Value Chain Slides)

  1. Primary Activities:
    • Inbound Logistics: Receiving and storing materials.
    • Operations: Transforming inputs into final products.
    • Outbound Logistics: Distribution of finished goods.
    • Marketing & Sales: Promotion and selling.
    • Service: Post-sale support.
  2. Support Activities:
    • Firm Infrastructure: Organizational systems and policies.
    • Human Resources: Recruitment and training.
    • Technology Development: Innovation and process improvement.
    • Procurement: Sourcing and purchasing.
  3. Uses of the Value Chain:
    • Identify competitive advantages using VRIO.
    • Enhance value or reduce costs in key activities (e.g., outsourcing).
  4. Value System:
    • Links between organizations that form the supply chain.
    • Decisions include:
      • Make or Buy: In-house vs. outsourcing.
      • Profit Pools: Identifying high-margin areas.
      • Partnerships: Strategic collaborations.

Quick Tips for Application:

  • Use VRIO to assess diversification strategies and competitive advantage.
  • Implement M-Form structure for complex organizations to enhance decision-making and accountability.
  • Analyze the Value Chain to optimize efficiency and cost-effectiveness.

PESTEL Framework

Analyzes the macro-environment across six key factors influencing strategy.

Political

  • Role of the state (e.g., as owner or customer).
  • Taxation, trade regulations, and political risks (e.g., BREXIT).
  • Impact of NGOs, campaign groups, and civil society organizations.

Economic

  • Business cycles, interest/exchange rates, and unemployment.
  • Disposable income and differential growth rates.
  • Industries affected by economic cycles (e.g., airlines, housing).

Social

  • Demographics, culture, and social networks.
  • Impact of societal changes on customer behavior and values.
  • Use sociograms to map organizational social connections.

Technological

  • New discoveries, R&D budgets, patenting activity, and tech advancements (e.g., IoT, nanotech).
  • Indicators: product announcements and media coverage.

Ecological

  • Green initiatives (pollution control, waste management, sustainable development).
  • Regulatory focus on climate change, recycling, and energy.
  • Stewardship across the product lifecycle.

Legal

  • Labor, consumer, and environmental regulations.
  • Market economy variations: liberal (US), coordinated (Germany), developmental (China).
  • Formal laws and informal norms shaping strategy.

Porter’s Five Forces

Evaluates the competitive structure of an industry.

  1. Rivalry Among Existing Competitors
    • High rivalry: slow growth, high fixed costs, low differentiation.
    • Low rivalry: high differentiation, innovation-driven.
  2. Threat of New Entrants
    • Barriers: economies of scale, distribution access, and legal restrictions.
    • Higher threats with low entry barriers or lack of retaliation.
  3. Threat of Substitutes
    • Alternatives from outside the industry with superior price/performance.
    • Examples: high-speed trains vs. airlines.
  4. Bargaining Power of Buyers
    • High buyer power: concentrated buyers, low switching costs.
    • Buyers can influence pricing and demand improved quality.
  5. Bargaining Power of Suppliers
    • High power: concentrated suppliers, high switching costs, rare inputs.
    • Suppliers may integrate forward to capture more value.

Complementors (Extra Factor)

  • Demand-side: Products enhancing customer value (e.g., apps for smartphones).
  • Supply-side: Attractiveness to suppliers when supplying multiple buyers.

Key Tips for Application

  • Focus on factors with high current and future relevance.
  • Identify opportunities and threats for strategic planning.
  • Use data and trend analysis for informed forecasting.