MGT 3830 Test 1

Vertical aspects of FFM

- Bargaining power of buyers - Bargaining power of suppliers

Arguments for a stakeholder perspective:

- Businesses have an ethical duty. - Prioritizing shareholders often hurts other stakeholders. - Shareholder maximization is associated with several negative outcomes. - Companies that do "good" do "well."

What groups comprise the industry environment?

- Customers - Suppliers - Competitors

Basic premises

1. Assumes industry as the source of profit. 2. The main determinant of the level of profitability in an industry is that industry's structure.

What three factors determine industry profitability?

1. The value of the product/service to customers 2. The level of competition between producers 3. The bargaining power of the producer relative to that of their suppliers and buyers

Appraising resources & capabilities Involves addressing 2 fundamental questions:

1. What is the strategic importance of difference resources and capabilities? 2. What are our strengths in these resources and capabilities relative to competitors?

In fast changing environments:

A firm will be better served by defining itself by its resources and capabilities

RBV:

A theoretical perspective that highlights the role of resources and capabilities as the principal basis for a firm's strategy - The firm's resources and capabilities are thought of as the main source of competitive advantage and the primary basis for formulating strategy

Bounded rationality:

As organizational actors, our analytical and computational abilities are limited simply because we are human

Core competencies:

Capabilities that: - Make a disproportionate contribution to value or efficient delivery of that value, or - Provide a basis for entering new markets

Porter's Five Forces Model

Central argument: An industry's profitability is determined by 5 competitive forces: - Rivalry between existing firms - Threat of new firms entering the industry - Threat from substitute products - Bargaining power of buyers - Bargaining power of suppliers

Human Resources

Charicteristics: Training, experience,adaptability, commitment and loyalty of employees, organizational culture Indicators: Employee qualifications, Pay rates, turnover

Business Environment

Consists of all of the external influences that affect its decisions and performance

Strategy as a Coordinating Device

Creates consistency and unity

Challenges/critiques of applying the FFM

Defining the industry and choosing the appropriate level of analysis • Derives from economic insights on what destroys profitability • Porter's Six Forces? • Assumes that industry forces are relatively stable and, thus, predictable • Should firms always avoid low profitability industries?

What is the E in PEST Analysis?

Economic Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation -Changes in wage rates and income distribution -Changes in exchange rates

For a resource or capability to establish a competitive advantage, the resource or capability needs to be widely available and relevant to key success factors within the market.

False

In general, the greater the rate of change in a firm's external environment, the more useful it is for a firm to use industry analysis as the foundation for long-term strategy.

False

Tangible Resources

Financial -Charicteristics: Borrowing capacity, Internal funds generation -Indicators: Debt/Equity ratio, Credit rating, Net cash flow Physical -Charictersitics: Plant and equipment: Size, location, technology flexibility. Land and buildings Raw materials -Indicators: Market value of fixed assets. Scale of plants Alternative uses for fixed assets

Shareholder view assumes

Firm as property (Narrow view of purpose)

Stakeholder view assumes

Firm as social entity (Broad view of purpose)

"Strategic fit"

For a strategy to be successful, it must be consistent with the firm's external and internal environments.

Apply industry analysis to...

Forecast industry profitability - Observe structural changes to forecast likely changes in competition and, thus, profitability • Position the firm in relation to competitive forces - Identify niches where competitive forces are weakest • Identify ways of changing the industry structure - Identify key structural features that are depressing industry profitability - Which of those are most amenable to change?

What are the two ways to classify capabilities?

Funtional and Value Chain Analysis

Functional analysis:

Identifies capabilities in relation to the main functional areas of the organization

Strategy as Target

Improves performance by setting high aspirations

Strategy as Decision Support

Improves the quality of decision making

Corporate planning:

Includes setting goals and objectives, forecasting key economic trends, establishing priorities for different products and business areas of the firm, and allocating capital expenditures based on macroeconomic forecasts

Strategy as Animation and Orientation

Motivates and mobilizes

Which of the following is a framework for categorizing key elements of an organization's external environment?

P.E.S.T

Strategic management:

Positioning the company in markets and in relation to competitors in order to maximize the potential for profit

Value chain analysis:

Separates activities into a sequential chain and explores the linkages between each activity

What is the S in PEST Analysis?

Sociocultural Changes in demographics e.g. the size of the population, the age distribution with the population Changing attitudes e.g. work/life balance, concern for the environment, ethical standards Changes in social structure e.g. socio-economic groupings, social mobility

Intended strategy:

Strategy as conceived by the TMT

3 Types of Resources

Tangible Resources Intangible Resources Human Resources

What is the T in PEST Analysis?

Technological Development of new products and processes Automation Developments in information and communication technologies Developments in the natural sciences

Intangible Resources

Technology -Charucteristics: Patent, copyrights, know-how, R&D facilities Technical and scientific employees -Indicators: Number of patents owned Royalty income R&D expenditure R&D staff Reputation -Charicteristics: Brands, customer loyalty, company reputation (with suppliers, customers, government) -Indicators: Brand equity Customer retention Supplier loyalty

Realized strategy:

The actual strategy that is implemented

Defining the Industry & Market

The central issue in defining an industry is who competes with whom. - Boundaries are rarely clear-cut. - In practice, it's a matter of judgement & experience. - How we define an industry has implications for our industry analysis.

Emergent strategy:

The decisions that emerge from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances

Value is created when:

The price that the customer is willing to pay for a product exceeds the firm's cost

Resources:

The product assets owned (controlled) by a firm - Think of these as what a firm has.

Distinctive competence:

Those things that an organization does particularly well relative to competitors

In a contestable market, there does not always need to be intense competition to keep prices relatively low - just the threat of new competitors entering the market.

True

Intangible resources are often more valuable than tangible resources in conferring competitive advantage.

True

Resources are a firm's productive assets; capabilities are what a firm can do.

True

Capabilities:

What a firm can do - its skills and abilities. - Think of these as how a firm employs its R&Cs.

two basic questions concern corporate and busiess strategy:

Where and How to compete?

Strategy is:

a unifying theme that gives coherence and direction to the actions and desicions of an individual or organization

If a company has only a few key strengths, this suggests the company should:

adopt a niche strategy

In practice, strategy making:

almost always involves both rational design and adaptation

Firms in any industry can be said to operate in 2 major markets:

as a buyer in the market for inputs and as a seller in the output market

A firm possesses a ____________ _________ when it earns (or has the potential to earn) a persistently higher rate of profit.

competitive advantage

Which characteristics of resources and capabilities determine the sustainability of the competitive advantage they offer?

durability, transferability, and replicability

The internal environment:

focuses on the relationship between a firms resoruces and capabilities and its buisness strategy

____________ can be thought of as the building blocks of what a firm can do.

human reosurces

The core of a firm's business environment is determined by:

its relationships with customers, competitors, and suppliers

Economies of scale are a barrier to entry because:

new entrants face the cost and risk of creating large-scale capactiy to start with or a severe cost disadadvantage if the enter on a smaller scale

In Porter's Five Forces framework, the term "industry attractiveness" refers to:

overall industry profitability

In the shift from corporate planning to strategic management, focus moved away from _____________________ and toward ________________

planning longterm based on macroeconomic forecasts; strategy as direction and guiding theme

_______________ is the organizational strategy that actually gets implemented

realized strategy

Resources and capabilities must meet what 2 conditions to establish a competitive advantage?

relavance and scarcity

if a firms strategy ensures it is consistent with both its internal and external enviorments, it achieves:

strategic fit

___________________ acts as alink between hte firm and its external enviorment

strategy

Strategy is about ________

success.

A prerequisite for industry profitability is:

the creation of value for customers

The basic premise of industry analysis is that:

the level of profitability within an industry is largely determined by the industry structure

Which of the following describes all of the sources of horizontal competition in an industry?

threat of new entry, rivalry between established competitors, threat of substitues

Industry analysis:

● Source of profit is external (industry environment) ● Main determinant of profitability is industry structure ● Assumes industry environment is relatively stable ● More useful in stable, predictable environment

R&C (Resources&Capabilities):

● Source of profit is internal ● Main determinant of (superior) profitability is competitive advantage ● Makes no assumptions about stability of environment ● Particularly useful in dynamic environments

Arguments for a shareholder perspective:

- Competition converges interests around firm survival. -Failing to maximize profits means getting taken over. - Over the long run, different interests aren't really that different. - It's much, much simpler.

How can managers monitor the vast array of possible influences?

- Distinguish between what is "vital" and what is "merely important" - PEST analysis as an environmental scanning framework

Who gets the superior value created by these resources & capabilities?

- If property rights secure ownership of the R&Cs by the firm, then the firm does. - If property rights are not clear, then appropriation is based on relative bargaining power. - The more embedded individual skills and knowledge are within organizational routines, the more the firm appropriates.

Where strategy is "located":

- In the heads of the people involved in formulating it - In publicly available statements and documents - In the decisions made and actions taken to enact the strategy

Horizontal asect of FFM

- Rivalry between existing firms - Threat of new firms entering the industry - Threat from substitute products

What are strategically important R&Cs?

- Those with the potential to generate substantial streams of profit for the firm that owns them. This potential is dependent upon 3 things: - Establishing a competitive advantage - Sustaining a competitive advantage - Appropriating the returns to competitive advantage

Characteristics that determine the extent to which a firm's competitive advantage is sustainable are:

- durability - transferability - replicability

The capacity for a resource or capability to establish a competitive advantage is dependent upon:

- its scarcity - its relevance

Resource-Based View

-A theoretical perspective that highlights the role of resources and capabilities as the principal basis for a firm's strategy -The firm's resources and capabilities are thought of as the main source of competitive advantage and the primary basis for formulating strategy

How do we get from resources to capabilities?

-Capabilities are based upon routinized behavior. -Organizational routines: Regular and predictable patterns comprising repetitive patterns of activity

3 levels of business strategy

-Corporate strategy: What bussinesses are we in? -Business Strategy: How do we compete in each of our maojr busuinesses? -Functional Strategy: How do we best support each of our business strategies?

Segmentation Variables

-Demographic: Gender, Age, Ethnicity -Socio econmic: Income, Education, Occupation -Psychographic: Personality, Lifestyle -Geographic: Region, Urban/suburban/rural -Behavioral: Purchase occasion, Loyalty, Use rate

Creating capabilities

-Individual resources must be combined into bundles of resources to work together. - Organizational members perform activities using these resources. - These activities become regular, predictable behavior patterns that make up repetitive patterns of activity. ... all through conscious and systematic actions!

Main source of competitive advantage: Industry analysis:

-Industry analysis: Carving out a unique position for a firm within its industry -RBV: A firm's unique mix of resources and capabilities

What is the P in PEST Analysis?

-Political/Legal Changes in government economic policy, e.g. taxation, government spending, monetary policy Changes in legal requirements e.g. employment law, health and safety legislation, licensing practices, environmental regulations, competition policy Changes in the government ownership e.g. nationalization, privatization, de-regulation

What determines an industry's attractiveness?

-The level of profitability that firms in that industry can earn. - And we already know this is determined by industry structure (specifically, competition).

success is not

-The outcome of a purely random process - Purely attributable to luck - Determined solely by superior endowments of resources & capabilities

Basic Questions about Strategy

-What is strategy? • How do we describe a firm's strategy? • How do we identify a firm's strategy? • How is strategy made? • What roles does strategy perform? • What purpose and whose interests does strategy serve? • Whose interests should strategy serve?

What are the four apects of an effective strategy?

-effective implementation -simple, consistent, long term goals -profound understanding of the competitive enviorment -objective appraisal of reasources

in addition to reading publicly available, published information, to identify and understand a firms strategy you should:

-identify where the company is making the most of its investments -identify where the company is doing most of its business -find out what new prodcuts and services the comany is putting the most effort into

strategy is not a detailed plan or program of instructions, instead..

-strategy is the means by which individuals or organizations achieve their objectives. - Strategy is a process