MGMT 498 exam 1
black swan effects
(happened in the first decade of the 21st century) Incidents that describe highly improbable, but high impact events ex: 9/11 very unlikely, but had a huge impact
computing ROIC
(net profits / invested capital)
upper-echelons theory
- A conceptual framework that views organizational outcomes—strategic choices and performance levels—as reflections of the values of the members of the top management team.
strategic groups
-A set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage -they differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service
limitations of accounting data
-All accounting data are historical & thus backward-looking -Past decisions don't guarantee future performance -Accounting data do not consider off-balance sheet items -Accounting data focus mainly on tangible assets, which are not longer the most important -Not everything that can be counted counts. Not everything that counts can be counted
the economic value creation shows that strategy is about
-Creating economic value -Capturing as much of it as possible
strong ethical values have two important functions
-First, they form a solid foundation on which a firm can build its vision and mission, and thus lay the groundwork for long-term success. -Second, values serve as the guardrails put in place to keep the company on track when pursuing its vision and mission in its quest for competitive advantage
Some of the profitability ratios most commonly used in strategic management are
-Return on invested capital (ROIC) -Return on equity (ROE) -Return on assets (ROA) -Return on revenue (ROR)
limitations of SWOT
-cannot show you how to gain advantage- -strengths may not leaf to advantage -narrow focus on external environment -static assessment of moving target -strengths can also be a weakness (example about California on page 131)
oligopoly
-consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power -the degree of pricing power depends on the degree of product differentiation -the key feature is that the competing firms are interdependent -few competitors, the actions of one firm influence the behaviors of the others
value chain analysis
-describes the internal activities a firm engages in when transforming inputs into outputs -Each activity the firm performs along the horizontal chain adds incremental value and incremental costs -allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic value creation breaks down into a distinct set of activities that helps determine perceived value and the costs to create it
monopolistic competition
-has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers
what are examples of perfect competition
-natural gas, copper and iron tend to approach this structure
monopoly
-only one, often large firm supplying the market -offer unique product, and challenges to moving into the industry tend to be high -pricing power -the one firm is the industry
what are the five forces
-threat of entry -power of suppliers -power of buyers -threat of substitutes -rivalry among existing competitors
what is the value of the strategic group concept
-to explain the differences in firm performance within the same industry, it clusters different firms into groups based on a few key strategic dimensions -even within the same industry, firm performances differ depending on strategic group membership -competitive rivalry is strongest between firms that are within the same strategic group -the external environment affects strategic groups differently -the five competitive forces affect strategic groups differently -some strategic groups are more profitable than others
what is the purpose of the five-forces model of competition
-to help managers understand the profit potential of different industries and how they can position their respective firms to fain and sustain competitive advantage -avoid competitive industries and positions -identify areas of profitability in an industry
firms manager must be able to accomplish these critical tasks
1. Accurately assess the performance of their firm 2. Compare and benchmark their firm's performance to other companies in the same industry or against the industry average
when strategizing from competitive advantage managers rely on three approaches:
1. Strategic planning 2. Scenario planning 3. Strategy as planned emergence
ROIC two components
1. shareholders equity 2. interest-bearing debt
what are the steps to the shareholder 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, and philanthropic responsibilities do we have to our stakeholders? 5. what should we do to effectively address the stakeholder concerns?
stakeholder impact analysis
A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen. In each step, managers must pay particular attention to 3 important stakeholder attributes: power, legitimacy, and urgency:
AFI strategy framework
A model that links three interdependent strategic management tasks- analyze, formulate, and implement- that, together, help managers plan and implement a strategy that can improve performance and result in competitive advantage.
perfect competition
A perfectly competitive industry is fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices. firms competing in this industry are similar in size and resources -consumers make decisions solely on price because the commodity product offerings are more or less identical
illusion of control
A tendency by people to overestimate their ability to control events.
strategic commitments
Actions to achieve the mission that are costly, long-term oriented, and difficult to reverse
strategic initiative
Any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures.
serendipity
Any random events, pleasant surprises,and accidental happenstances that can have a profound impact on a firm's strategic initiatives.
emergent strategy
Any unplanned strategic initiative bubbling up from the bottom of the organization.
realized strategy
Combination of intended and emergent strategy. is generally formulated through a combination of its top-down strategic intentions and bottom-up emergent strategy.
mission
How do we accomplish our goals? what an organization does. it defines the means by which vision is accomplished.
when does ROIC generate value
If a firm's ROIC > cost of capital
backwards integration
Occurs when a buyer moves upstream in the industry value chain, into the seller's business. ex: private label brands
sustainable competitive advantage
Outperforming competitors or the industry average over a prolonged period of time.
competitive parity
Performance of two or more firms at the same level
most commonly used metrics in assessing firm financial performance
ROIC
what does the competitive industry structure refer to
Refers to the elements and features common to all industries
autonomous actions
Strategic initiatives undertaken by lower- level employees on their own volition and often in response to unexpected situations.
planned emergence
Strategy process in which organizational structure and systems allow bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management.
scenario planning
Strategy-planning activity in which top management envisions different what-if scenarios to anticipate plausible futures in order to derive strategic responses.
competitive advantage
Superior performance relative to other competitors in the same industry or the industry average
intended strategy
The outcome of a rational and structured top-down strategic plan.
strategy formulation
The part of the strategic management process that concerns the choice of strategy in terms of where and how to compete.
strategy implemtation
The part of the strategic management process that concerns the organization, coordination, and integration of how work gets done, or strategy execution
level 5 leadership pyramid
The pyramid is a conceptual framework that shows leadership progression through five distinct, sequential levels (Jim Collins). effective strategic leaders go through a natural progression of five levels. Each level builds upon the previous one; the manager can move on to the next level of leadership only when the current level has been mastered
dominant strategic plan
The strategic option that top managers decide most closely matches the current reality and which is then executed.
resource allocation process (RAP)
The way a firm allocates its resources based on a predetermined policies, which can be critical in shaping its realized strategy.
competitive disadvantage
Under performance relative to other competitors in the same industry or industry average
VRIO framwork
V: Valuable R: Rare I: costly to Imitate O: Organized to capture the value of the resource
values
What commitments do we make, and what guardrails do we put in place, to act both legally and ethically as we pursue our vision and mission?
vision
What do we want to accomplish ultimately? captures an organization's aspiration and spells out what it ultimately wants to accomplish.
how do you gain competitive advantage
a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods and services similar to the competitors' at a lower price.
market capitalization
a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time
cost of capital
a firm's cost of financing operations from both equity through issuing stock & debt through issuing bonds
top-down strategic planning
a rational, data-driven strategy process through which top management attempts to program future success.
strategy
a set of goal-related actions a firm takes to gain and sustain superior performance relative to competitors. to achieve superior performance companies compete for resources
customer oriented vision statements
allows companies to adapt to changing environments
SWOT
allows the strategist to evaluate a firm's current situation and future prospects by simultaneously considering internal (strengths and weaknesses) and external factors (opportunities and threats).
stakeholder strategy
an integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage
stakeholder strategy allows firms to
analyze and manage how various external and internal stakeholders interact to jointly create and trade value
producer surplus
another term for profit, the difference b/w price charged (P) and the cost to produce (C) or (P - C)
resources
any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy
organizational core values
are the ethical standards and norms that govern the behavior of individuals within a firm or organization
sociocultural
capture the society's cultures, norms and values -Population demographics, income distribution, social mobility, lifestyle changes, attitudes to work and leisure, consumerism, levels of education
resource heterogeneity
comes from the insight that bundles of resources, capabilities and competencies differ across firms -This insight ensures that analysts look more critically at the resource bundles of firms competing in the same industry because each bundle is unique to some extent
how do we assess competitive advantage
compare a firm performance to a benchmark- that is, either the performance of other firms in the same industry or an industry average.
rivalry among existing competitors
competitive rivalry is high when price competition is intense within the industry
corporate strategy
concerns questions relating to where to compete in terms of industry, markets, and geography.
business strategy
concerns the question of how to compete. Three generic business strategies are available: cost leadership, differentiation, or value innovation.
functional strategy
concerns the question of how to implement a chosen business strategy.
industry effects
describe the underlying economic structure of the industry. They attribute firm performance to the industry in which the firm competes. -Elements such as entry and exit barriers, number and size of companies, and types of products and services offered
resource immobility
describes the insight that resources tend to be sticky and don't move easily from firm to firm -Because of the stickiness, the resource differences that exist between firms are difficult to replicate and therefore, can last a long time.
strategies 3 elements
diagnosis of competitive advantage, strategy formulation, implementation
profit
difference b/w price charged (P) and the cost to product (C), or (P - C); aka producer surplus
consumer surplus
difference b/w the value a consumer attaches to a good/service (V) an that he paid for it (P) or (V - P)
economic value creation
difference b/w value (V) and cost (C) or (V - C)
activities
distinct and fine-grained business processes such as order taking, the physical delivery of products, or invoicing customers
technological
factors capture the application of knowledge to create new processes and products -Govt. research spending, govt. and industry focus on technological effort, new discoveries/developments, speed of technology transfer, rates of obsolescence
economic
factors in a firms external environment are largely macroeconomic, affecting economy-wide phenomena -Business cycles, GNP trends, interest rates, money supply, inflation, unemployment, disposable income
legal
factors include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions -Competition law, employment law, health and safety, product safety
firm effects
firm performance attributed to the actions managers take
intangible resources
firm's culture, its knowledge, brand equity, reputation, and intellectual property
example of monopolistic competition
hardware industry
external stakeholders
include customers, suppliers, alliance partners, creditors, unions, communities, governments at various levels, and the media
internal stakeholder
include stockholders, employees (including executives, managers, and workers) and board members.
firm performance is determined by
industry and firm effects
environmental
involve broad environmental issues such as natural environment, global warming, and sustainable economic growth -Environmental protection laws, waste disposal, energy consumption
why is ROIC popular
it is a good proxy for firm profitability. It measures how effectively a company uses its total invested capital
tangible resources
labor, capital, land, buildings, plant, equipment, and supplies
strategic management process
lays the foundation for sustainable competitive advantage.
5 levels of leadership pyramid
level 1: highly capable individual 2: contributing team member 3: competent manager 4:effective leader 5: executive
formulation stage of scenario planning
management teams develop different strategic plans to address possible future scenarios. This kind of what-if exercise forces managers to develop detailed contingency plans before events occur.
analysis stage of scenario planning
managers brainstorm to identify possible future scenarios. Input from several different hierarchies within the organization and from different functional areas such as R&D, manufacturing, and marketing and sales is critical.
implementation stage of scenario planning
managers execute the dominant strategic plan, the option that top managers decide most closely matches the current reality.
what is the goal of PESTEL
not to produce an exhaustive list, but to identify the relevant factors that will influence firm performance going forward and develop strategies to avoid or capitalize on them.
computing market capitalization
number of outstanding shares X share price
stakeholders
organizations, groups, and individuals that can affect or are affected by a firm's actions.
strategic leadership
pertains to executives' use of power and influence to direct the activities of others when pursuing an organization's goals
PESTEL
political, economic, sociocultural, technological, environmental/ecological, legal
3 important stakeholder attributes
power legitimacy and urgency
power of buyers
power of buyers in high when buyers have high bargaining power and/or when they are price sensitive
power of suppliers
power of suppliers is high when suppliers have high bargaining power and/or when they are price sensitive
political
result from the processes and actions of government bodies that can influence the decisions and behavior of firms. ex: Government stability, taxation policy, foreign trade regulations, social welfare policies
total return to shareholders
return on risk capital that includes stock price appreciation plus dividends received over a specific period
core value statement
statement of principles to guide an organization as it works to achieve its vision and fulfill its mission, for both internal conduct and external interactions; it often includes explicit ethical considerations -It offers bedrock principles that employees at all levels can use to deal with complexity and to resolve conflict. Such statements can help provide the organization's employees with a moral compass.
value
the dollar amount (V) a consumer attaches to a good/service; the consumer's max willingness to pay; also called reservation price
strategic management
the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Mastery of strategic management enables you to view a firm in its entirety
reservation price
the maximum price a consume is willing to pay for a product or service based on the total perceived consumer benefits
risk capital
the money provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt
effective management of stakeholders
the organization, groups, or individuals that can materially affect or are affected by the action of a firm- is necessary to ensure the continued survival of the firm and to sustain any competitive advantage
capabilities
the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically
strategic business units or SBU's
the standalone divisions of a larger conglomerate, each with its own profit-and-loss responsibility.
threat of substitutes
threat is high when consumers can easily choose alternative goods from other industries
threat of entry
threat is high when there are few barriers to entry
what does accounting data enable us to do
to conduct direct performance comparisons b/w different companies
core competencies
unique strengths that are embedded deep within a firm -Allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost
when does a stakeholder have power
when it can get the company to do something that it would otherwise not do.
when does a stakeholder have a legitimate claim
when it is perceived to be legally valid or otherwise appropriate
when does a stakeholder have an urgent claim
when it requires a company's immediate attention and response.
how is the competitive industry structure captured
• Number and size of its competitors • The firms' degree of pricing power • The type of product or service • The height of entry barriers