Capstone: Test 2

innovation

both novel and useful; the systematic practice of developing and marketing breakthrough products and services for adoption by customers

Types of Corporate Diversification

1.Single business ◦Low level of diversification 2.Dominant business ◦Additional business activity pursued 3.Related diversification A.Constrained: all businesses share competencies B.Linked: some businesses share competencies 4.Unrelated diversification (conglomerate) ◦No businesses share competencies

True

A cost leader is the firm most likely to survive a price war.

False

A manager's only responsibility is to monitor and assess the performance of his or her firm.

False

A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

Accounting Profitability

Accurately assesses firm performance Compares firm performance to competitors / industry average

Entrepreneurs

Agents who introduce change Undertake economic risk to innovate ◦Create new products, processes, & organizations

a consumer electronics company popular among price-conscious customers

Airbase is a consumer electronics company known for its affordable mobile devices that follows a cost-leadership strategy. In this scenario, Airbase should ideally compare its strategic position with

product diversification (from quiz)

Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of

what range of products the firm should offer

Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make?

a conglomerate

Argus Inc. is a large multinational company owned by two partners, is active in the petroleum, capital market, chemicals, steel, beverages, hospitality, airlines, education, automobiles, and consumer electronics industries. The company has multiple brands and a large product portfolio under its banner. Which of the following terms would best describe this company?

Isolating Mechanisms

Barriers to imitation Prevents rivals from competing away firm advantage

Strategic Trade Offs

Choices between a cost or value position.

Introduction Stage

Core competency: R&D Strategic objective: market acceptance & future growth Capital-intensive ◦Designing a unique product ◦Trying new ideas to attract customers ◦Producing small quantities

False

Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.

Economies of Scale

Decreases in cost per unit; achieved as output increases

Decline Stage

Demand falls rapidly. ◦Innovation efforts cease ◦Strong pressure on prices

Growth Stage

Demand increases rapidly others have tested Product has been improved and/or process to make has

false

Differentiation and cost leadership strategies are only effective in manufacturing industries.

Blue Ocean Strategy

Differentiation and cost-leadership activities Uses value innovation to reconcile trade-offs ◦Untapped market space ◦Creation of additional demand ◦Opportunities for highly profitable growth

consumer surplus plus firm profit.

Economic value creation is best expressed as

return on risk capital

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the

business level strategy

Goal-directed actions: ◦To achieve competitive advantage ◦In a single product market "How should we compete?"

vertically integrate

Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should

The Strategy Canvas

Graphical depiction of a company's performance ◦Relative to its competitors ◦Shows focus or divergence

Shakeout Stage

Growth has slowed Intense competition - forces out weak firms - consolidation

Complements add value to a product when they are consumed in tandem with it

How does availability of complements act as a value driver?

radical innovation will disturb the existing power distribution within the firms

Incumbent firms favor incremental innovation over radical innovation because

increased competition from imitators

Lillypad Toys is a manufacturer of educational toys for children. Six months ago, the company's research and development division came up with an idea for a unique touchscreen device that can be used to introduce children to a number of foreign languages. Three months ago, the company produced a working prototype, and last month the company successfully launched its new device on the commercial market. What should Lillypad's managers prepare for next?

False

Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

an agency

Mega Media sells books by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells a book, he or she gets a predetermined percentage commission. This type of business model is called

franchising

Mondo Tacos, a fast food restaurant, operates through a business model in which individuals can buy the rights to set up Mondo Taco stores and sell the company's food in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month. The owners of the stores have to offer a menu approved by the company's headquarters and also maintain consistent customer service as expected in its flagship store. Which of the following alternatives to integration does this best illustrate?

Risk Capital

Money provided for an equity share

Focused Business Strategies

Narrower competitive scope

Maturity stage

Peak industry - Only a few large firms remain - market reached max size

False

Pipeline businesses are typically better than platform businesses at incorporating user feedback and taking advantage of network effects.

The Principal-Agent Problem

Principal - the owner of the firm ◦Goal: create shareholder value Agent - manager or employee ◦Should act on behalf of the principal Problem: ◦Agents pursue their own interests ◦Corporate jets, golf outings, expensive hotels One Solution: ◦Stock options to make agents owners

Strategic Position

Profile based on value creation and cost ◦In a specific product market A valuable and unique position, which: ◦Meets customer needs ◦At the highest possible product value ◦For the lowest possible product cost

Value Innovation

Pursuing both differentiation and cost leadership at the same time

low-cost input factors

Quick Clean Chemicals outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is available in plenty for very low wages. This has helped the company become a price leader in the chemicals industry. Which of the following is the key driver behind Quick Clean's strategic position?

Restructuring

Reorganizing and divesting business units and activities Helps refocus a company Helps leverage core competencies more fully

Corporate Strategy

The decisions that leaders make Goal directed actions Boundaries of the firm ◦Vertical integration ◦Diversification ◦Geographic scope

growth stage

The leading producer of cell phone backup batteries, Jumpstart, has achieved great success because they produce high-quality battery backups that are not too expensive. Even so, another company that produces lower-quality batteries at the same price has also achieved some success, but not as much as Jumpstart. Also, in general, the price of backup batteries has declined because of economies of scale and learning. In addition, Jumpstart has added complementary assets, such as a carrying case. Considering all of these factors, the backup battery industry is most likely in the

triple-bottom-line approach.

The management team for Volcanic Batteries came up with the following vision statement: "Volcanic Batteries will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment." This vision statement is most likely based on the

by having higher performance in another sector

The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?

False

The pace of innovation has slowed in the 21st century.

Network Effects in the Introduction Stage

The positive effect that one user has on the value of a product for other users

business model

The translation of strategy into action primarily takes place in a firm's

Narrow the scope of competition and focus on unique features such as the use of organic materials.

Thomas is the owner of a landscaping company that caters to a very wealthy clientele. His company has struggled to differentiate itself from the other high-end landscapers in the area, but because he has hired several expensive but highly-qualified team members, Thomas is unable to shift to a cost leadership strategy. Which strategy is most likely to achieve a competitive advantage?

Why firms need to grow

To increase profits and shareholder returns To lower costs and achieve economies of scale To increase market power To reduce risk through diversification To motivate management

VRIO Framework

Value, Rarity, Imitability, Organization

Three Dimensions of Corporate Strategy

Vertical integration, diversification, and geographic scope

Three Standard Performance Dimensions

What is the firm's accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate?

patent.

When ReGen Pharmaceuticals released a new drug to treat insomnia, its chemical composition was disclosed at the back of the drug's cover. However, any attempts by competitors to copy the chemical composition would result in infringement of ReGen Pharmaceuticals intellectual property rights. Thus, the drug is protected by a

strategic trade-offs.

When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in

continues to support marketing efforts even if the demand for the product is declining

When a firm pursues a maintain strategy, it

availability of complements

When wireless service providers offer free or discounted mobile phones for subscriptions to their wireless voice and data service, the perceived value of the service offering increases. In this case, the value driver would be

It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.

Which of the following best explains why a blue ocean strategy is difficult to implement?

It is the product of the number of outstanding shares and the share price.

Which of the following expressions accurately describes market cap?

Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.

Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?

The framework does not explain everything about changes in industries.

Which of the following is a drawback of using the industry life cycle as a framework to guide strategic choice?

the cost of searching for a contract manufacturer

Which of the following is an example of an external transaction cost?

introduction, growth, shakeout, maturity, and decline

Which of the following lists the stages of the industry life cycle in the correct order?

Rachel implemented a new and more efficient way to produce pottery

Which of the following scenarios would be characteristic of an entrepreneur?

Opportunity costs

are best described as the value of the best forgone alternative use of the resources employed.

Cost of input factors

◦Raw materials, capital, labor, and IT services

The innovation process

idea, invention, innovation, and imitation

geographic diversification

increase in variety of markets/geographic regions

product diversification

increase in variety of products/services

Information asymmetry

is best described as a situation in which one party is more informed than another, because of the possession of private information.

minimum efficient scale (MES)

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

Economies of Scope

producing two outputs at less cost; shares resources or technology; doing more less less

product - market diversification

product and geographic diversification

Internal transaction costs

◦Recruiting and retaining employees ◦Setting up a shop floor

Resource Immobility

resources don't move easily from firm to firm, difficult to replicate, and can last for a long time

Resource Heterogeneity

unique bundle of resources and capabilities

Taper Integration

◦Backward or forward integrated ◦Plus reliance on outside firms

Incremental Innovation:

◦Builds on established knowledge ◦Results from steady improvement ◦Targets existing markets and technology

Dimensions of Corporate Strategy

◦Core Competencies ◦Economies of Scale ◦Economies of Scope ◦Transaction Costs ◦Cost effectiveness of vertical integration vs. diversification

Platform Business

◦Enables interaction between producers and consumers ◦Enable matches among users ◦Provides infrastructure and governance

Architectural Innovation:

◦Existing technology leveraged into a new market ◦Known components, used in a novel way

Diseconomies of Scale

◦Firms too big ◦Complexities of too much coordination ◦Inflexible and slow

Experience-curve effects

◦Improvements to technology and production processes

Learning-curve effects

◦Less time to produce output with experience

Disruptive Innovation:

◦Leverages new technologies in existing markets ◦New product / process meets existing customer needs

Pipeline Business

◦Linear transformation through the value chain ◦R&D, then design, then manufacture, then sell

Strategic Outsourcing

◦Moving internal value chain activities

Radical Innovation:

◦Novel methods & materials ◦Entirely new knowledge base ◦Or, recombination of existing knowledge ◦Targets new markets and technology

Forward Vertical Integration

◦Owning activities closer to the customer

Backward Vertical Integration

◦Owning inputs of the value chain

Strategic Entrepreneurship

◦Pursuit of innovation using strategic tools ◦Combining entrepreneurial actions ◦Creating new opportunities ◦Exploiting existing opportunities

Cost Leadership Strategy

◦Reduce cost below competitors ◦Offer adequate value ◦Reduce prices for customers ◦Optimize the value chain for low cost Sell as many as you can at a small profit margin

External transaction costs

◦Searching for contractors ◦Negotiating, monitoring, and enforcing contracts

Differentiation

◦Seeks to create higher value vs. competitors ◦Offers unique features ◦Charges higher prices Unique perception

Cost Leadership

◦Seeks to create similar value vs. competitors ◦Charges lower prices

Social Entrepreneurship

◦The pursuit of social goals AND a profitable business

Organizational Inertia:

◦They have formalized processes and structures

Economic Incentives

◦They must defend their position

Innovation Ecosystem:

◦They rely on certain suppliers, buyers, complementors