Internal Analysis Contains - Business Level Strategy

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Chapter 4 – Internal Analysis Contains

Change is difficult and, often, inevitable. It is during change when managers need effective forecasting skills, both nationally and globally. Forecasting requires leaders and managers to best understand the internal environment and develop strategies to ensure effective processes and long-term sustainability. Describe forecasting and managing future trends, development, and change with a focus on emerging markets throughout the United States or globally. Explain why monitoring change in this specific emerging market is important to managers.

Describe the largest organizational change you have experienced. What was the impetus for that change? Did change management do a good job of removing or alleviating those obstacles? What impacts did the change have at the organizational level, team level, and individual level?



Chapter 5 – Business Level Strategy

What are competitive dynamics? Why has competition become more dynamic in the past few decades? Support your comments by discussing one more examples from the contemporary environment. Using APA standards, cite at least one story/example from popular media (newspaper, radio, television, internet, podcast, etc.).


Length 500 words (250 words/question)
Respond to the question prompt in a well written, concise manner. Critically analyze by providing outside professional and scholarly references (at least 2). Always, cite and reference accordingly in APA format. The CSULB Style Manual and Citation Methods or Purdue Owl Writing Lab are great online resources for APA assistance.

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1 2 Learning Objectives  Ask six key questions to determine whether an organizational resource or capability will lead to a sustainable competitive advantage.  Understand the value chain and know how to create an industry or sub-industry valuechain.  Know the difference between tangible and intangible resources.  Determine which of five key resource areas is likely to lead to a sustainable competitive advantage.  Understand what types of knowledge are more likely to be associated with a sustainable competitive advantage.  Appreciate the importance of patents, copyrights, trademarks, brands and reputations in determining the competitiveness of a firm.  3 Examples of Firm Resources and Capabilities 4 Six Questions that Determine the Value of Firm Resources and Capabilities 5 6 Types of Resources  Tangible Resources  Can be seen, touched and/or quantified  Examples are manufacturing processes and products  Tend to be easy to imitate  Intangible Resources  Hard to quantify  Examples are knowledge, skills, abilities and relationships with stakeholders  Difficult to imitate. Makes them good sources of competitive advantage  Industry Differences  The resources and capabilities that lead to competitive advantage vary from industry to industry 7 Competitiveness and Resource Interconnectedness 8 Commonly Used Financial Ratios  Profitability  Gross profit margin  Sales-COGS / Sales X 100  Efficiency of operations and product pricing  Net profit margin  Net profit aft. Tax / Sales X 100  Efficiency after all expenses are considered  Return on Assets (ROA)  Net profit aft. Tax / Total Assets X 100 Page 1  Productivity of Assets  Return on Equity (ROE)  Net profit aft. Tax / Stockholders Equity X 100  Earnings power of equity 9 Commonly Used Financial Ratios  Liquidity  Current Ratio  Current Assets / Current Liabilities  Short-run debt paying ability  Quick Ratio  Current Assets - Inventories / Current Liabilities  Short-term liquidity  Leverage  Debt to Equity  Total Liabilities / Stockholder’s Equity  Extent to which stockholders’ investments are leveraged  Total Debt to Total Assets (Debt Ratio)  Total Liabilities / Total Assets  Percent of assets financed through borrowing 10 Commonly Used Financial Ratios  Activity  Asset Turnover  Sales / Total Assets  Efficiency of asset utilization  Inventory Turnover  Cost of Goods Sold / Average Inventory  Management’s ability to control inventory investments  Average Collection Period  Receivables X 365 days / Annual Credit Sales  Effectiveness of collection and credit policies  Information may only be available to internal managers  Accounts Receivable Turnover  Annual Credit Sales / Receivables  Effectiveness of collection and credit policies  Information may only be available to internal managers 11 The Value Chain 12 Value Chain-based Sources of Competitive Advantage  Develop an advantage in any of the primary or support activities  Develop an advantage in the way any of the primary or support activities are combined  Develop superior linkages between one or more of the activities and stakeholders in the external environment Page 2 13 Strategic Leadership  Create organizational vision  Envision what the organization should be like in the future  Communicate this vision to followers  Empower followers to enact the vision  Establish core values for the organization  Develop strategies and a management structure  Foster an environment conducive to organizational learning and development  Serve as coach, teacher and facilitator  Help organizational members question their assumptions  Serve as a steward for the organization 14 Leadership Approaches  Commander  CEO formulates strategy and then directs subordinates to implement  Change  CEO formulates strategy and then plans changes to structure, personnel, information systems, and administration to implement it  Collaborative  CEO initiates planning. Group discusses, agrees and takes responsibility for their parts of the strategy  Cultural  CEO and top management team formulate vision and strategy and then mold a strategysupportive culture  Crescive  Lower-level managers formulate and implement their own strategic plans. CEO encourages innovation and filters out inappropriate ideas 15 Agency Theory  Agents  Managers, as agents for the owners, should pursue their best interests  Agency problem  Managers may maximize their own self-interests at the expense of owners  Entrenchment  Occurs when managers gain so much power that they use the firm to further their own interests rather than the interests of shareholders  Situations in Which Agency Problems Sometimes Exist  Empire building for status  Extremely high salaries of some CEOs  CEO duality 16 Effective Boards  Take an active role in the organization  Protect shareholder interests Page 3  Advise top management  Provide resources such as contacts with external stakeholders  Includes outsiders  External stakeholders who sit on the board  Bring fresh ideas and breadth of knowledge  High percentage of outsiders makes a board independent. The best defense against agency problems  Includes insiders  Provide stability and enhanced understanding of internal operations  17 Employees  Employees and the way they are managed are important sources of competitive advantage  More sophisticated HR practices lead to higher productivity, especially in capital-intensive industries  High performance work practices lead to lower turnover, higher productivity and performance  Effective HR Practices  Work with people instead of replacing them or limiting the scope of their activities  Get people involved in organizational improvements  Employee stock ownership plans (ESOPs)  Performance-based compensation plans 18 Structure and Culture  Organizational structure can greatly influence performance  Includes reporting relationships  Division of people into groups, teams, task forces, and departments  Some organizations are becoming “modular” in an attempt to increase speed and flexibility  Many organizations are decentralizing responsibility and improving rewards for innovations and flexibility  Organizational Culture  A system of shared values of an organization’s members 19 Defining an Organization’s Culture  Attitude Towards Customers  Respect vs. indifference  Attitude Towards Competitors  Compliance, cooperation, or competitiveness  Achievement Orientation  Industry leader or follower  Risk Tolerance  Degree to which individuals are encouraged to take risks  Conflict Tolerance  Degree to which individuals are encouraged to express differences Page 4 20 Defining an Organization’s Culture  Individual Autonomy  The amount of independence and responsibility given to individuals in decision making  Employee Relations  Cooperative vs. adversarial relationships among employees  Management Relations  Cooperative vs. adversarial relationships between managers and employees  Goal Ownership  Identification with goals and concerns of organization as a whole vs. identification with goals and concerns of a work group or department  Management Support  Cooperative vs. adversarial relationships between managers and employees 21 Defining an Organization’s Culture  Perceived Compensation Equity  Perceived relationship between performance and rewards  Decision-making Style  Rational and structured vs. creative and intuitive  Work Standards  Diligent, high performing vs. mediocre  Moral Integrity  Degree to which employees are expected to exhibit truthfulness  Ethical Integrity  Degree to which decisions are expected to be balanced with regard to stakeholder interests vs. focused exclusively on a key objective like profitability  22 Types of Cultures  Craftsmen  Focus on quality  Can evolve into “tinkerers” if obsession for perfection results in products that are overengineered and overpriced  Builder  Focus on growth  If efforts to grow become careless, culture becomes “imperialist”  Pioneer  Focus on being the leader in product / technology development  If firm pursues impractical products or technologies, it becomes “escapist”  Salesman  Focus on marketing  If firm overemphasizes marketing at the expense of product capability or quality, if becomes “drifter” 23 We Live in a Knowledge Economy Page 5  Knowledge is an intangible asset  Core vs. Integrative Knowledge  Core knowledge--scientific or technological knowledge associated with creation of a product or service  Integrative knowledge--helps integrate various activities, capabilities and products.  More difficult to acquire and more difficult to imitate  Codified vs. Tacit Knowledge  Codified knowledge--can be communicated completely through written means  Tacit knowledge--difficult to articulate in a way that is meaningful and complete  More difficult to acquire and more difficult to imitate 24 Tasks Associated with Internal Knowledge Creation and Utilization  Knowledge Creation  Develop reward systems that encourage innovative thinking.  Create a forum whereby creative ideas are shared.  Invest in research and development programs.  Knowledge Retention  Document findings from research and development programs.  Create information systems that record and organize innovative ideas.  Document both the ideas and managerial responses or organizational responses to them.  Document successes and failures. 25 Tasks Associated with Internal Knowledge Creation and Utilization  Knowledge Sharing  Create an information system that shares results from research and development projects with other parts of the organization.  Routinely pass new ideas on to managers who can act on them.  Create a database management system to organize ideas generated from employees and managers so that they can be retrieved systematically at a later date.  Knowledge Utilization  Reduce bureaucratic barriers that prevent knowledge from resulting in new program and projects.  Encourage risk taking.  Reward success.  26 Facilitating Knowledge Transfer in Joint Ventures  Flexible Learning Objectives  Enter into a venture with learning objectives, but be willing to adjust those objectives if needed  Leadership Commitment  A strong, higher-level manager must champion the learning objective. This person acts as a catalyst for knowledge transfer.  A Climate of Trust  Critical to the free exchange of knowledge Page 6 27 Facilitating Knowledge Transfer in Joint Ventures  Tolerance for Redundancy  Redundancy leads to more interaction among participants and interaction leads to more sharing of information  Creative Chaos  High-stress events can enhance transfer of knowledge by focusing partners on solving problems and resolving difficulties  Focus on Learning in Spite of Performance  Organizations can still learn from ventures that don’t perform well 28 General Organizational Resources  Patents and Brands  Organizational Reputation  Superior Relationships with Stakeholders  Other Resources Specific to Each Firm 29 Major Concepts in Chapter 4  The value of a resource or capability as a source of competitive advantage depends on its market value, its uniqueness, whether a substitute exists, whether systems exist to take advantage of it, whether the organization is aware of a realizing the advantages and whether the the resource or capability is easy to imitate.  Financial resources can be a source of competitive advantage, although they may not be unique or hard to imitate. Financial analysis is an important part of internal analysis. 30 Major Concepts in Chapter 4  The value chain activities (primary and support) can be sources of competitive advantage  Humans are an organization’s most unique asset. HR practices are being given increasing attention  Boards of directors oversee the actions of top managers and provide advice and resources  Agency problems can exist when managers pursue their own interests at the expense of the shareholders  Organizational culture (shared values) is another potential source of competitive advantage 31 Major Concepts in Chapter 4  Knowledge management is critical to organizational success. The focus is on creation, retention, sharing and utilization. Joint ventures should be managed so as to maximize knowledge acquisition  General organizational resources include brands, patents, reputation and relationships with external stakeholders Page 7 1 2 Learning Objectives  Distinguish the business-level strategy of any hospitality organization by determining if it is a cost leader, differentiator, or best value and whether it addresses a broad or narrow market focus.  Identify the risk factors associated with pursuing various business strategies.  Explain the key factors firm’s use to create a low-cost or differentiation strategy.  Know the definition of creative destruction and why it is important for making sense of competitive dynamics.  List the offensive and defensive strategies firms can use to compete effectively.  Create a strategic group map to help you understand the strategies of competitors in an industry. 3 Business-level Strategy Formulation Responsibilities  Direction Setting  Establishment and communication of mission, vision, values, long-term goals of a single business unit  Creation and communication of shorter-term goals  Analysis of Business Situation  Compilation and assessment of information from stakeholders, broad environmental analysis and other sources  Internal resource analysis  Identification of strengths, weaknesses, opportunities, threats, sources of sustainable competitive advantage 4 Business-level Strategy Formulation Responsibilities  Selection of Strategy  Generic approach to competition—cost leadership, differentiation, focus or best value  Strategic posture—specific strategies needed to carry out the generic strategy  Management of Resources  Acquisition of resources and/or development of competencies leading to sustainable competitive advantage  Ensure development of functional strategies and an appropriate organizational design (management structure) to support business strategy  Develop control systems to ensure that strategies remain relevant and that the business unit continues to progress toward its goals  5 Generic Business-level Strategies 6 Cost Leadership  High Capacity Utilization (combined with accurate demand forecasting)  Economies of Scale  Technological Advances  Outsourcing Page 1  Learning / Experience Effects 7 8 A Typical Learning Curve 9 Risks Associated With Cost Leadership Strategy  May not detect required product or marketing changes due to preoccupation with cost  Investments in plants and equipment may become obsolete due to technological breakthroughs  Large investments cause reluctance to change  Competitors may quickly imitate cost-saving strategies  May go too far in cutting costs, thus endangering customers or employees 10 Differentiation  Uniqueness may be achieved through many means. Examples are:  Product innovations  Superior quality  Superior service  Creative advertising  Better supplier relationships  The key to success is that customers must be willing to pay more for the uniqueness of the product or service than the firm paid to create it. 11 Risks Associated with a Differentiation Strategy  Customers may be willing to sacrifice special features due to a high price  Customers may no longer perceive an attribute as differentiating  A source of differentiation may be easy to imitate. Constant innovation is necessary. 12 Best Value Strategy  A combination of strategic elements from differentiation and low cost  Firms can increase sales of an attractive product or service. Sales increases may lead to efficiency and thus reduced costs  Consumers are coming to expect a combination of high quality and low price  Technological advances often allow a company to pursue differentiation and low cost at the same time  Many companies are pursuing best value through an emphasis on quality or speed 13 Risks Associated with a Best Value Strategy  A Tradeoff Between Risks of Cost Leadership and Differentiation  Technological breakthroughs can make the strategy obsolete  Risk of imitation  However,  Unlikely to become preoccupied with cost or differentiation  Unlikely to take cost cutting too far  Increases likelihood of being able to recover additional costs associated with differentiation Page 2  14 Focus Strategy  Can be based on differentiation, lowest cost or best value  Key is to provide a product or service that caters to a particular market segment.  Must identify segment  Must assess and meet the needs of the segment better than competitors (target marketing)  May also be called a “niche” strategy 15 Risks Associated with a Focus Strategy  Risks depend on whether the strategy is being pursued through differentiation, lowest cost or best value as well as:  The desires of the target market can become similar to the desires of the whole market, thus eliminating advantage in catering to the target market  A competitor may focus on an even more narrowly defined segment of the market 16 Competitive Dynamics  Competitive action and reaction  Creative destruction  The inevitable decline of leading firms due to competitive moves and countermoves  Competition has been increasing in most global industries 17 Strategies that Reflect Competitive Dynamics  Aggressive Competition  Exploit ownership of superior resources.  Overwhelm competitors through a combination of factors that could include the best products or services, superior advertising, the lowest production cost, superior design, the lowest price or the strongest brand name.  First-mover Advantage  Invest significantly more time and resources to creating state-of-the-art products and services than competitors to protect leadership position.  Organizational learning capacity is important.  Collaboration  Partnerships and alliances with stakeholders to offset the influence of a powerful rival (defensive strategy).  Or, if a company is the largest rival, create partnerships and alliances that will block new competition or hurt existing competitors (offensive strategy). 18 Strategies that Reflect Competitive Dynamics  Threat of Retaliation  Make it very clear to competitors that a firm will retaliate against any action that will upset the balance in the industry.  The threat must be believable.  Firms may compete simultaneously in multiple industries (multi-market competition). Therefore, a firm could retaliate in another industry. Page 3  Government Intervention  A political strategy in which the firm hires lobbyists and creates strong relationships with political leaders or parties in an effort to influence the “rules of the game”.  Create Barriers to Imitation  Many potential barriers exist, including economies of scale, patents, special relationships with stakeholders (pre-emptive collaboration), or private information. 19 Strategies that Reflect Competitive Dynamics  Strategic Flexibility  An organization limits investments in fixed capi ...
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