Strategic Management: Exam 1 Study Guide

What are the three broad tasks associated with AFI? Which key topics and questions are addressed in each of the AFI tasks?

1. Analysis: Strategic leadership and the strategy process, Internal/External Analysis, & Competitive Advantage, Firm Performance, and Business Models 2. Formulation: Business Strategy, Corporate Strategy, & Global Strategy 3. Implementation: Organizational Design & Corporate Governance/Business Ethics

What are the four most important cost drivers?

1. Cost of input factors: raw materials, capital, labor 2. Economies of scale 3.Learning-curve effect: less time to produce output w/ experience 4. Experience-curve effects: improvements to technology & production processes

What does the AFI framework explain and predict? How does the framework help managers?

1. Explains and predicts differences in firm performance. 2. Helps leaders formulate and implement a strategy that can result in superior performance.

What are the three hallmarks of what strategy is NOT?

1. Grandiose statements: ex-"we will be #1 2. A failure to face a competitive challenge 3. Operational effectiveness, competitive benchmarking, or tactical tools. (calling policies...strategies)

What are the four components or CSR? What is the Pyramid of Corporate Social Responsibility?

1. Philanthropic 2. Ethical 3. Legal 4. Economic The CSR Pyramid consists of Economic responsibilities being at the bottom or foundation of the pyramid and working its way up to the very top, Philanthropic responsibilities.

What are three important stakeholder attributes?

1. Power: over the company 2. Legitimacy: has legitimate claim when it is perceived to be legally valid or otherwise appropriate 3. Urgency: urgent claim when it requires a companies immediate attention and response

What are the three most salient value drivers?

1. Product features 2. Customer service 3. Complements

What is the goal of a cost leadership strategy?

1. Reduce cost below competitors 2. Offer adequate value 3. Reduce prices for customers 4. Optimize the value chain for low cost

What are the five steps in the stakeholder impact analysis?

1. Who are our stakeholders? 2. What are our stakeholders interests and claims 3. What opportunities and threats do our stakeholders present 4. What economic, legal, ethical, & philanthropic responsibilities do we have to our stakeholders 5. What should we do to effectively address the stakeholder concerns.

How do learning effects differ from economies of scale?

1. differences in timing 2. differences in complexity

Why does effective stakeholder management benefit firm performance?

1. important information is shared 2. increased trust & lowers business transaction costs 3.leads to greater adaptability/flexibility 4. more predictable and stable returns 5. stronger reputation

What three things do economies of scale allow firms to do?

1. spreads fixed costs over a larger output 2. Employs specialized systems & equipment 3. Takes advantage of certain physical properties

What is strategy canvas (also see exhibit 6.11 relating to JetBlue)?

A Graphical depiction of a company's performance: Relative to its competitors, shows focus or divergence and viewed across the industry's key competitive factors. Reveals key strategic insights.

What is corporate social responsibility (CSR)?

A company has obligations to its local community, people & society, and should be accountable for the social & ethical effects of its actions

What is a learning curve? At what time were learning curves first documented in the U.S.?

A downward sloping curve that showed as production doubled, the per unit cost decreased by a predictable and constant rate. 1st documented in the airplane manufacturing during WW2 (1930s).

What is strategy?

A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors

What is a strategic position? What does it help a firm to accomplish?

A strategic profile based on value creation and cost in a specific product _market_ Helps firm accomplish: 1. Meet customer needs 2. Maximize product value 3. Lowest possible product cost

What is a blue ocean strategy?

A strategy that combines both differentiation & cost-leadership activities

What is strategic positioning?

A unique position within an industry that allows the firm to provide value to customers, while controlling costs

What is a stakeholder strategy?

An integrative approach to managing a diverse set of stakeholders to gain and sustain competitive advantage.

What can a company's return on invested capital tell us about its competitive advantage?

By comparing it to the industry average. If the industry average is 20% and your ROIC is 15%, then your business is underperforming or at a competitive disadvantage

What are strategic trade-offs?

Choices between a cost OR value position.

What are economies of scale?

Decrease in cost per unit from increased output

Which groups are considered internal stakeholders?

Employees, Stockholders, Board members

To gain a competitive advantage, what does a firm need to provide? What are the rewards of superior value creation and capture?

Firms need to provide: goods/services that consumers value more highly than their competitors. The rewards are: profitability and greater market share.

What is a business-level strategy? Which broad question does it concern?

Goal-directed actions to achieve competitive advantage in a single product market. The broad question is: "How should we compete?"-Who the customer is, what needs to satisfy, why satisfy those needs, and how to go about doing that.

How does economic value created relate to potential competitive advantage?

If the company's economic value is greater than its competitors = competitive advantage

What is a good strategy and what does it consist of?

It is based on 3 elements: 1. Analysis-A diagnosis of the competitive challenge 2. Formulation-A guiding policy to address the competitive challenge. 3. Implementation-A set of coherent actions to implement the firm's guiding policy

Who are stakeholders?

Organizations, groups, and individuals that can affect or are affected by a firm's actions.

What is a competitive advantage?

Superior performance relative to other competitors in same industry or the industry average. It is relative...not absolute.

Are learning curve effects more pronounced in simple or complex manufacturing?

The more complex the underlying process to manufacture a product or deliver a service, the more learning curve effects we can expect.

How do Walmart and The Home Depot benefit from utilizing physically large "big-box" stores?

They can stock more merchandise and handle inventory more efficiently

What is Differentiation strategy & Focused differentiation strategy

Unique features that increase value, so that consumers pay a higher price Focused: means the same but with a narrow focus in a niche market

What does the formula (V - C) represent?

Value - Cost > Competitors

Economic contribution is determined by what?

Value Creation (price consumers are willing to pay) - Costs (costs for your company to make good/service) Economic Contribution = your profit

What are two positions associated with firm effects?

Value Position & Cost Position

What is being stuck in the middle?

When a "Blue Strategy" has gone bad = the firm has neither a clear differentiation nor a clear cost-leadership profile. Leads to inferior performance and a resulting competitive disadvantage.

What is a stakeholder impact analysis?

a decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders

What is sustainable competitive advantage?

a firm that is able to outperform its competitors or the industry average over a prolonged period. EX: Apple iphone vs. Samsung Galaxy

What is process innovation?

a new method or technology to produce an existing product

What is the goal of a differentiation strategy?

add unique features to increase perceived value of Goods/Services in consumer's mind so they pay higher prices

Hoes does a complement act as a value driver?

adds value to a product/service when they are consumed in tandem. Ex: Smart phones & Apps. the more apps you offer the more value of your smartphone

What is strategic management?

an integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage

Why is a blue ocean difficult to implement?

because it requires reconciling two distinct strategic positions - differentiation & low cost

What is the first step to gain and sustain a competitive advantage?

by providing value creation with products/services at a price point that consumers can/willing to pay that also enables the company to make a profit.

What is cost parity?

costs = to other competitors

Which groups are considered external stakeholders?

customers, suppliers, creditors, unions, communities, governments, media

What does it mean for a firm to have a 70 percent learning curve?

every time outputs doubled... costs declined by 30%. Total overall costs are only 70% of what they were last time output doubled.

What is a value curve?

graphic representation (basic component of strategy canvas) of a firm's relative performance across different competitive factors in an industry

How do external stakeholders differ from internal stakeholders?

internal stakeholders work for/ get paid by company, own shares in company and represent interest in the company. External stakeholders don't work for the company but are impact by the company and the companies performance/contributions to the economy.

What is the key to successful strategy (to gain a competitive advantage)?

is to combine a set of activities to stake out a unique strategic position within an industry. Competitive advantage has to come from performing different activities or performing the same activities differently than rivals are doing.

What is the AFI Strategy Framework?

model that links three interdependent management task that help firms conceive of and implement a strategy that can improve performance and result in competitive advantage

Under what condition does a value driver contribute to a firm's competitive advantage (stated in equation form)?

only if their increase in value creation (∆V) exceeds the increase in costs (∆C). ∆V > ∆C

What is competitive parity?

performance of two or more firms at the same level

What is value creation?

price consumers are willing to pay

How does process innovation relate to the experience curve?

process innovation can create a new or steeper curve

What is value innovation (see IKEA example)?

reducing a firm's costs while also increasing perceived value for buyers.

What are economies of scope?

savings that come from producing two (or more) outputs at less cost but shares the same resources and technology

What is Cost-leadership strategy & Focused cost-leadership strategy

seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. Focused: means the same but with a narrow focus in a niche market

What tension must managers address so as not to erode the firm's economic value creation?

tension between value creation and pressure to keep cost in check

What is minimum efficient scale?

the output range needed to bring the cost per unit down as much as possible, allowing a firm to stake out the lowest-cost position achievable through economies of scale.

What is the experience curve?

there is a change in underlying technology while holding output constant.

What is competitive disadvantage?

underperformance relative to other competitors in the same industry or the industry average. They underperform against their rivals & industry average.

What is differentiation parity?

value = same as competitors

What are diseconomies of scale?

when costs start to increase as output increase and you begin producing at an output beyond the minimum efficient scale.

Scope of competition

whether to pursue a specific, narrow part of the market or go after the broader market

What types of tradeoffs did Walmart and Nordstrom make to pursue different strategies?

•Walmart: cost leader - big box outlet, low prices. •Nordstrom: differentiator - professional salespeople, luxury setting.