INSTRUCTIONS: Please RESPOND to this answer from the Point of view as a student. Use credible sources and respond as if you are a manager of a marketing agency. Tell this student what your marketing agency would think of each of these answers from a Management perspective in about 4-5 paragraphs:
As stated by Carpenters and Sanders, “Competing in turbulent environments requires finesse in addressing the staging element of the strategy diamond.” Firms are constantly engaged in offensive and defensive marketing strategies. Established firms continuously face attacks by new entrants and incumbents trying to reposition themselves or improve their competitive position. Defensive strategies work better if they take place before the challenger enter into the industry by making investments or other types of commitments, or before exit barriers are raised, making it difficult for a challenger to exit the industry. It is easier to defend a position because it requires fewer resources than offensive strategies. Incumbents enjoy several advantages relative to new entrants including economies of scale, capital requirements, switching costs, brand loyalties, and brand recognition. Attacking firms need three times more resources than defending firms for launching a successful attack. In some circumstances, the resource requirements can be higher, if the incumbent is deeply entrenched in its market. The purposes of defensive are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify its competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have.
“Successful strategy in hypercompetitive markets is based on three elements. First is the vision for how to disrupt a market by setting goals, building core competencies necessary to create specific disruptions. Secondly, key capabilities enabling speed and surprise in a wide range of actions. Finally, disruptive tactics as illuminated in the game theory by shifting the rules of the game, signaling, simultaneous and strategic thrusts. Managers should build their strategies on resources that pass the above tests. In determining what valuable resources are, firms should look at both external industry conditions as well as their internal capabilities. Resources can come from anywhere in the value chain and can be physical assets, intangibles, or routines. Continuous improvement and upgrading of the resources is essential to prospering in a constantly changing environment. Firms should consider industry structure and dynamics when deciding which resource to invest in. Good strategy requires continual rethinking of the company’s scope, to make sure it’s making the most of its resource and not getting into markets where it does not have a resource advantage,” (Wekesa, n.d.).
The company I used to work for was facing turbulent times few years back due to competition from China since they were in the business of plastic distribution and most of the clients were in China. To withstand turbulent times, they restructure the organization to lower the costs, increase their capabilities in value chain by negotiating better rates, etc. This helped them better compete in the market. They also started investing in new technologies and company created culture of innovation.
The Real options is used for capital budgeting and strategic decision making tool. It is based on the assumption that there is uncertainty in regards to price of a commodity or research outcome which managers can adjust their strategy for. Some companies use real options to terminate joint ventures, or management of manufacturing network. It is the opportunity to take action that will either maximize the upside or limit the downside of a capital investment (Carpenter & Sanders, p. 190, 2008).
There was case back in early 1990s of Merck using this tool to evaluate their venture with small biotech firms since they wanted to enter a new line of business which require use of new technology which this small biotech firm had. To calculate the value of option, they used five parameters such as stock price, exercise price, time to expiration, volatility rate, and risk free interest rate. Using these inputs, Merck calculated the option value for the base case scenario and each of the sensitivity cases. Merck also examined the value of the option assuming that it was either a two-year, three-year, or four-year option. These 15 option values (5 cases X 3 expiration dates) were compared to the cost of buying the option, which is equal to the costs of licensing and developing the technology. Investment decision was based on the value of the option relative to the $2.8 cost of purchasing the option. Using the base case scenario and a three-year expiration date, Merck concluded that the option value was $11.9 million, and the three-year sensitivity case, a value of $4.8 million, both of which are far in excess of the $2.8 million cost of the option, leading to a decision to invest.
“Options are a theoretically attractive way to think about the flexibility inherent in many investment proposals; however, the use of the methodology presents many practical difficulties, which can lead all but the most careful users to make erroneous conclusions. The complexity of the options approach can also make it difficult to find errors in the analysis, or overly ambitious assumptions used by optimistic project champions. These practical difficulties may explain the limited use of real options analysis in strategic planning. One approach to solving the problem of misspecified option valuation models is to create a more advanced, customized option valuation algorithm that better matches the characteristics of the investment proposal”, (Bowman & Moskowitz, 2009).
References
1)Bowman, E., & Moskowitz, G. (2009). Real options as a technique for evaluation of research projects in pharmaceutical industry. Retrieved November 12, 2016, from http://moluch.ru/archive/115/30742/
2)M. Carpenter & Wm. Sanders (2008). Strategic Management. A Dynamic Perspective. Upper Saddle River, N.J: Prentice Hall.
3)Wekesa, E. (n.d.). Repository Home. Retrieved November 12, 2016, from http://erepository.uonbi.ac.ke/
