Strategic Management Midterm

What are the differences between tangible and intangible resources? Which category of resources is more
valuable to the firm?

Tangible resources are assets that can be seen and quantified; whereas, intangible resources include assets
that are rooted deeply in the firm’s history and have accumulated over time.

Tangible resources include:

1. Financial Resources
2. Organizational Resources
3. Physical Resources
4. Technological Resources

The value of tangible resources are often constrained because they are hard to leverage.

Intangible resources are difficult for competitors to analyze and imitate. These include:

1. Human Resources
a. Knowledge
b. Trust
c. Managerial Capabilities
d. Organizational routines

2. Innovation Resources
a. Ideas
b. Scientific Capabilities
c. Capacity to innovate
3. Reputational Resources
a. Reputation with customers
b. Brand Name
c. Perceptions of the product
d. Reputation with suppliers
e. For efficient, effective, supportive, and mutually beneficial interactions and relationships.

Because its difficulty to be imitated and analyzed, intangible resources are more valuable to a firm.

Palmetto was an early pioneer of personal data assistants (PDAs) and dominates that market space (in terms of
market share) with its core product, the Palmetto Pidgy. Because this product category was entirely new to the
market, Palmetto had to internally develop the hardware and software sides of the business, and today is both a
manufacturer of PDAs and a programmer and licensor of its PDA operating system software. Recently, however,
the hand-held device maker's performance has taken a dive as a result of slumping sales and costly inventory
problems. New large entrants are entering both the equipment and software sides of its business, putting further
pressure on margins. Management is currently considering its options, including the break up of Palmetto into
two separate, independent public companies-one devoted to hardware, the other software.
1. What primary business strategy issues does Palmetto face?

Palmetto internally develops the hardware and software sides of the PDA business, and today is both a
manufacturer of PDAs and a programmer and licensor of its PDA operating system software. The main issue
facing Palmetto’s business strategy is treats by large competition entering the market. These firms are
specializing in either hardware or software. Palmetto’s business strategy is too broad to continuously compete
with these specialized companies.
2. What primary corporate strategy issues does Palmetto face?
Competitors are easily able to imitate Palmetto’s technology, and are taking back market share from the
company’s initial first-mover advantage. The sizes of the emerging competitors are very large, making it difficult
for Palmetto to combat competitive actions.
3. How do the I/O and resource-based models help you make recommendations to Palmetto's
management regarding a split into two companies? Do they lead to the same recommendation?

The I/O and resource based models yield different results. Palmetto’s competitive advantage is being eaten
away by large new entrants. The general, competitive, and industry environments have changed since the
company first entered the market. Its internal resources are too broad in scope to efficiently specialize in both
hardware and software. The firm is capable because it has a unique set of intangible resources that have been
developed since first moving into the industry.
According to the I/O Model the company should try to leverage these strengths in the strategy it implements.
However, if the firm splits then many of these resources will be lost or damaged. Therefore, this model is against
the idea of splitting into two companies.
The resource-based model says a firm should select a strategy that best allows the firm to utilize its resources
and capabilities relative to opportunities in the external environment. Therefore, the firm should split into two
companies to be to develop a stronger competitive advantage through specializing in one aspect.
Barracuda Inc. is a lamp fixture manufacturer that is considering an entry strategy into the U.S. home furnishings
manufacturing industry. The existing landscape consists of many players but none with a controlling share.
There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average net
profit after tax is between 4 and 5%. While the industry is still primarily comprised of single-business family-run
firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the
European imports are leaders in contemporary design. Relatively large established firms are also diversifying
into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively
concentrated industries (like lumber, steel, and textiles). Retailers, the intermediate customer of the home
furnishings industry, have been traditionally very fragmented. Customers have many products to choose from, at
many different price points, and few home furnishing products have strong brands. Also, customers can switch
easily among high and low-priced furniture and other discretionary expenditures (spanning big screen TVs to the
choice of postponing any furniture purchase entirely).
Threat of Entry:
There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees.
The industry is still primarily comprised of single-business family-run firms, which manufacture furniture
domestically.
Threat of entry is extremely high.

Bargaining Power of Suppliers:

Supplier firms to the industry are in relatively concentrated industries (like lumber, steel, and textiles). These
prices are easily predicted.
Bargaining power of suppliers is low.

Bargaining Power of Buyers:

Customers have many products to choose from, at many different price points.
Retailers have been traditionally very fragmented; and, few home furnishing products have strong brands.
Bargaining Power of buyers is high.
.
Threat of Substitute Products:
Home furnishings are easily imitated. Most companies have access to the same tangible resources.
Intangible resources are less likely to be imitated.
Products are easily substituted. However, intangible capabilities and services are not.

Rivalry:
The existing landscape consists of many companies, but there are few major competitors.
Imports are increasing rapidly and pose a threat. Some European imports are leaders in contemporary design.
Relatively large established firms are also diversifying into the home furnishings industry via acquisition.
Customers can switch easily among high and low-priced furniture and other discretionary expenditures, posing
increased competition.
Rivalry is highly intense.
Opportunities:
Incredible amount of market share to be gained.
No clear industry leader.
Low bargaining power of suppliers.
Threats
Intense competition because of low switching costs.
Products are easy imitated.
High buyer bargaining power.
High threat of entry.
Attractiveness
With net profit after tax being between 4 and 5%, the industry is attractive. There is a lot of room for growth and
a very large customer base. Any company that can get figure out how to get a solid grasp in part of the market
will do well.

What do firms need to know about their competitors?

Firms need to know:

a. What drives the competitor, as shown by its future objectives.
b. What the competitor is doing and can do, shown by its current strategy.
c. What the competitor believes about the industry as shown by its assumptions.
d. What their capabilities are, as shown by its strengths and weaknesses.

What legal and ethical intelligence gathering techniques can be used to obtain this information?

A competitive analysis based on the above statements can be used to legally and ethically gather
competitor information.

Two legal and ethical ways to gather information are:

1. Publicly available information
2. Attend trade fairs and shows

Plasco is a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and
freezable food containers, and a broad range of other plastic storage containers designed for home and office
use. Historically, Plasco has been the category killer for most of its products and has devoted tremendous
resources to new product development on an ongoing basis-this research intensity has allowed the company to
release, on average, a new product every day over the past five years. Despite its past strength and high brand
awareness, Plasco's profitability has been eroded by dramatic increases in the cost of plastic resin, the primary
input into its plastic products. Moreover, the retail channel has experienced rapid consolidation resulting in a shift
in the balance of power from branded manufacturers like Plasco, to strong retailers like Wal-Mart, who in turn
have been unwilling to help Plasco absorb the higher resin costs. Enhancing Wal-Mart's power is the fact that it
can always turn to alternative high-volume sources of consumer plastic products like Sterlite. Further hampering
Plasco's recovery is the emergence of feisty little foreign competitors like Zig Industries, a $250 million Israeli
firm that has begun to take part of Plasco's market share in plastic toolboxes. Ironically, Plasco was the first
company to offer plastic toolboxes some 20 years ago. This innovation changed the market dramatically and
Plasco's first mover strategy rewarded it with a rapidly growing new segment and a dominant market position.
Today, Plasco's toolboxes are viewed as rather boring, while Zig's products are ingeniously designed to catch
the customer's eye in the aisle (better merchandising the product) and capture their interest (and pocketbook)
with many new and novel features. Zig is also able to provide this new line of toolboxes at between 10% and
15% less than Plasco.
1. Is Wal-Mart Plasco's competitor or its customer?
Wal-Mart is considered a customer of Plasco. However, because of its intense bargaining power some may view
Wal-Mart as a competitor, if it houses your competition’s products over of yours. Wal-Mart rewards suppliers that
able to quickly adapt their products and continuously appeal to customers. Wal-Mart is not the competitor.
2. Is the toolbox business a slow-, standard-, or fast-cycle business?
The toolbox business is a slow-cycle. Plasco was the first company to offer plastic toolboxes some 20 years ago.
This innovation changed the market dramatically and Plasco's first mover strategy rewarded it with a rapidly
growing new segment and a dominant market position. The market is finally beginning to change as companies
such as Zig are beginning to further innovate the product.
3. How can a small player like Zig be such a successful competitor against a large, established firm like
Plasco?
The smaller company is more flexible than the larger Plastico. It also has a late-mover advantage because it has
had time to study the industry and develop a formidable strategy to compete against larger firms such as Plasco.

Why is it important to prevent core competencies from becoming core rigidities?

Core rigidities are former core competencies that sow the seeds of organizational inertia. They prevent the firm
from responding appropriately to changes in the external environment. If a competence is emphasized when it is
no longer competitively relevant, it can become a weakness.
Discuss how a cost leadership strategy can allow a firm to earn above-average returns in spite of strong
competitive forces. Address each of the five competitive forces.
1. Rivalry with existing competitors – rivals hesitate to compete on the basis of price because of the
cost-leader’s advantageous position.
2. Bargaining power of buyers – prices that are low enough to prevent the next-most-efficient
competitor from earning average returns would force that firm to exit the market, leaving the cost leader
with less competition and in an even stronger position. Customers would lose their power and pay higher
prices if they were forced to buy from a single firm operating in an industry without rivals.
3. Bargaining power of suppliers – higher margins relative to those of competitors make it possible
for the cost leader to absorb a supplier’s price increases.
4. Potential entrants- ever improving levels of efficiency enhance profit margins which serves a
barrier to entry.
5. Product Substitutes – with the ability to lower its prices even further and still maintain competitive
levels of differentiation, the cost leader increases the probability the customer will prefer its product
rather than a substitute.

Describe the risks of a differentiation strategy.

 1. Customers might decide that the price differential between the differentiator’s product and the cost
leader’s product is too large.
2. A firm’s means of differentiation may cease to provide value for which customers are willing to pay.
3. Experience can narrow a customer’s perceptions of the value of a product’s differentiated features.
4. Makers of counterfeit goods provide the same product at a significantly reduced price.
Define slow-cycle, fast-cycle and standard cycle markets.

Slow: Are frequently shielded by monopoly power or very strong brand loyalties. A lack of rivalry may lead to
sustained competitive advantage.

Standard: Often lead to highly competitive pressures despite world class products. Firms with multi-market
competition may dampen rivalry somewhat. Sustained competitive advantage is a possible outcome.

Fast: Intensely dynamic and a 1st mover advantage is often unsustainable. Firms may cannibalize older
generation product while introducing new innovative premium ones. Sustainable competitive advantage is
unlikely.

What are the two ways that an unrelated diversification strategy can create value?

Financial economies – cost savings realized through improved allocation of financial resources based on
investments inside or outside the firm.
Financial economies realized through:
a. Efficient internal allocations
b. Restructuring of acquired assets
What are the managerial motives to diversify?

1. Diversifying managerial employment risk

2. Increasing managerial compensation