MHR 423 Exam 1

weaknesses opportunties quadrant

shore up an internal weakness to improve its ability to take advantage of an external opportunity

a sixth force

- complements

corporate strategy

- concerns questions relating to where in terms of industry, markets, and geography

internal strengths and weaknesses

- concerns resources, capabilities, and competencies - VRIO framework

a firm has a competitive advantage when...

- it creates more economic value than rival firms

VRIO

- valuable - rare - costly to imitate - organized to capture the value of the resource

blue oceans

- represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth

market capitalization

- captures the total market value of a company's total outstanding shares at any given point in time = # of outstanding shares X share price

external environment

- the industry in which the firm operates and the competitive forces that surround the firm from the outside

strategic tradeoffs

- choices between a cost or value position; such choices are necessary because higher value creation tends to generate higher cost

realized strategy

- combination of intended and emergent strategy

successfully implemented blue ocean strategies allow the firm two pricing optiosn

(1) the firm can charge a higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins (2) the firm can lower its price below that of the differentiator because of its lower cost structure

Levels of employment

- Boom times: unemployment tends to be low, and skilled human capital becomes a scarce and more expensive resource - Economic downturns: unemployment rises; skilled human capital is more abundant and wages usually fall

external opportunities and threats

- PESTEL and porter's five forces analyses

either strategy pursued

- V must always be greater than C to and gap must be largest in strategic group to have competitive advantage

complementor

- a company that provides a good or service that leads customers to value your firm's offering more when the two are combined - firms may choose to provide the complements themselves or work with another company to accomplish this

level 5 leadership pyramid

- a conceptual framework of leadership progression with 5 distinct, sequential levels - the manager can move on to the next level of leadership only when the current level has been mastered

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 - states that executives interpret situations through the lens of their unique perspectives, shaped by their personal circumstances, values and experiences - the theory favors the idea that strong leadership is the result of both innate abilities and learning

5. IP protection

- a critical intangible resource that can provide a strong isolating mechanism, and thus help to sustain a competitive advantage - Intent of IP protection is to prevent others from copying legally protected products or services - e.g. patents, designs, copyrights, trademarks, trade secrets

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 - five step process

dynamic capabilities

- a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage - rather than creating a static fit, the firm's internal strengths should change with its external environment in a dynamic fashion - prevents a core rigidity

business model

- a firm's plan that details how it intends to make money - the translation of strategy into action takes place in the firm's business model, which details the firm's competitive tactics and initiative - the business model stipulates how the firm conducts its business with its buyers, suppliers, and partners

strategic position

- a firm's strategic profile based on the difference between value creation and cost - relates to the firm's ability to create value for customers while containing the cost to do so - ompetitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce (V - C)

strategic position

- a firm's strategic profile based on value creation and cost in a specific product market - firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm's product creates and the cost required to produce it (V-C)

core rigidity

- a former core competency that turned into a liability because the firm failed to hone, refine, and upgrade the competency as the environment changed

SWOT analysis

- a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses with those from an analysis of eternal opportunities and threats

PESTEL model

- a framework that categories and analyzes an important set of external factors that might impact a firm; these can create both opportunities and threats for a firm

strategic group model

- a framework that explains differences in firm performance within the same industry - clusters different firms into groups based on a few key strategic dimensions

corporate social responsibility (CSR)

- a framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time

five forces model

- a framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy

industry

- a group of incumbent companies that face more or less the same set of suppliers and buyers - firms competing in the same industry tend to offer similar products or services to meet specific customer needs

growth rate

- a measure of the change in the amount of goods and services produced by a nation's economy - real growth rate: adjusts for inflation - indicates the current business cycle of the economy, that is, whether activity is expanding or contracting

industry analysis

- a method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry

dynamic capabilities perspective

- a model that emphasizes a firm's ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment - the essence of this perspective is that competitive advantage is not derived from static resource or market advantages, but from a dynamic reconfiguration of a firm's resource base

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 than can improve performance and result in competitive advantage 1. analyze the external and internal environments 2. formulate an appropriate business and corporate strategy 3. implement the formulated strategy through structure, culture, and controls

resource based view

- a model that sees certain types of resources as key to superior firm performance - a resource includes any assets, as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy

industry convergence

- a process whereby formerly unrelated industries begin to satisfy the same customer need - often rough on by technological advances

complement

- a product, service, or competency that adds value to the original product offering when the two are used in tandem - complements increase demand for the primary product, thereby enhancing the profit potential for the industry and the firm

top down strategic planning

- a rational, data driven strategy process through which top management attempts to program future success - All strategic intelligence and decision making responsibilities are concentrated in the office of the CEO - Often rests on the assumption that we can predict the future from the past

costly to imitate

- a resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost

rare resource

- a resource is rare if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition - If the resource is common, it will result in perfect competition where no firm is able to maintain a competitive advantage

valuable resource

- a resource is valuable if it helps a firm exploit an external opportunity or offset an external threat - enables a firm to increase its economic value creation

strategy

- a set of goal directed actions a firm takes to gain and sustain superior performance relative to competitors - describes the firm's overall efforts to gain and sustain competitive advantage

4. social complexity

- a situation in which different social and business systems interact with one another - I.e. when the source of the company's competitive advantage is socially complex - Emerges when two or more systems are combined: copying the emerging complex social systems is difficult for competitors because neither direct imitation nor substitution is a valid approach

3. causal ambiguity

- a situation in which the cause and effect of a phenomenon are not readily apparent - I.e. when the source of the company's competitive advantage is causally ambiguous

2. path dependence

- a situation in which the options one faces in the current situation are limited by decisions made in the past - I.e. when a company has accumulated a resource advantage that can be imitated only over long periods of time

2. legitimacy

- a stakeholder has a legitimate claim when it is perceived to be legally valid or otherwise appropriate - shareholders have the most legitimate claim on a company's profits

3. urgency

- a stakeholder has an urgent claim when it requires a company's immediate attention and response

1. power

- a stakeholder has power over a company when it can get the company to do something that it would otherwise not do

strategic business units

- a standalone division of a larger conglomerate, with its own profit and loss responsibility - general managers in SBUs must answer business strategy questions relating to how to compete in order to achieve superior performance - within the guidelines received from corporate headquarters they formulate an appropriate generic business strategy, including cost leadership, differentiation, or value innovation, in their quest for competitive advantage

vision

- a statement about what an organization ultimately wants to accomplish - it captures the company's aspiration - uses the word "to"

sustainable strategy

- a strategy along the economic, social, and ecological dimensions that can be pursued over time without detrimental effects on people of the planet (triple bottom line strategy)

illusion of control

- a tendency by people to overestimate their ability to control events

direct imitation

- a way to copy or imitate a valuable and rare resource when firms have difficult protectiong their advantage

competing firms are interdependent in an oligopoly

- actions of one firm influence the behaviors of the other - game theory: attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated

strategic commitments

- actions to achieve the mission that are costly, long term oriented and difficult to reverse

1. cost of input factors

- advantage of having access to lower cost input factors such as raw materials, capital, labor and IT services

shortcomings of the different models discussed (PESTEL and Porter's)

- all the models are static and do not take into account industry dynamics - do not allow managers to fully understand why there are performance differences among firms in the same industry or strategic group

employee stock ownership plans (ESOPs)

- allow employees to purchase stock at a discounted rate or use company stock as an investment vehicle for retirements savings

product features

- allows firms to turn commodity products into differentiated products demanding a premium price

stakeholder theory

- an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return

stakeholder strategy

- an integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage - the unit of analysis is the web of exchange relationships a firm has with its stakeholders

strategic initiative

- any activity a firm pursued 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 unpinning strategic initiative bubbling up from the bottom of the organization

2. resource immobility

- assumption in the resource based view that a firm has resources that tend to be "sticky" and that do not move easily from firm to firm - Because of that stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time

1. resource heterogeneity

- assumption in the resource based view that a firm is a bundle of resources and capabilities that differ across firms - ensures that analysts look more critically at the resource bundles of firms competing in the same industry (or even the same strategic group), because each bundle is unique to some extent

isolating mechanisms

- barriers to imitation that prevent rivals form competing away the advantage a firm may enjoy

reason trade happens

- both transacting parties capture some of the overall value created

5. advantages independent of size

- brand loyalty - proprietary technology - preferential access to raw materials and distribution channels - favorable geographic locations - cumulative learning and experience effects

level 5 leader

- build greatness through a combination of will and humility

blue ocean strategy

- business level strategy that successfully combines differentiation and cost leadership activities using value innovation to reconcile the inherent trade offs

level 4 leader

- can lead a group to superior levels of performance

3. sociocultural factors

- capture a society's cultures, norms and values - demographic trends: trends that capture population characteristics related to age, gender family size, ethnicity, sexual orientation, and socioeconomic status

4. technological factors

- capture the application of knowledge to create new processes and products

power of suppliers

- captures pressures that industry suppliers can exert on an industry's profit potential

benchmark

- compare firm performance to either the performance of other firms in the same industry or an industry average

power of buyers

- concerns the prissy an industry's customers can put on the producer's markings in the industry by demanding a lower price or higher product quality

business strategy

- concerns the question of how to compete - e.g. cost leadership, differentiation, value innovation

functional strategy

- concerns the question of how to implement a chosen business strategy

fragmented industry

- consists of many small firms and tends to generate low profitability

oligopoly

- consolidated with a few (large) firms - some pricing power - differentiated product high entry barriers

co-opetition

- cooperation by competitors to achieve a strategic objective

1. economies of scale

- cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms from their suppliers - these factors in turn drive down the cost per unit, allowing large incumbent firms to enjoy a cost advantage over new entrants who cannot muster such scale

2. economies of scale

- decreases in cost per unit as output increases - achieve with greater market share

product oriented vision statements

- defines a business in terms of a good or service provided - focus employees on improving existing products and services without consideration of underlying customer problems to be solved - often constraint the ability to adapt to changing environments

customer oriented vision statements

- defines a business in terms of providing solutions to customer needs - identify a critical need but leave open the means of how to meet that need - focus employees to think about how best to solve a problem for a customer - allow companies to adapt to changing environments

weaknesses threats quadrant

- derive "defensive" alternatives by eliminating or minimizing an internal weakness in order to mitigate an external threat

strengths opportunities quadrant

- derive "offensive" alternatives by using an internal strength in order to exploit and external opportunity

4. capital requirements

- describe the pricy of the entry ticket into a new industry - the threat of entry is high when capital requirements are low in comparison to expected returns

deflation

- describes a decrease in the overall price level - a sudden and pronounced drop in demand generally causes deflation, which in turn offices sellers to lower prices to motivate buyers

strategic leadership

- describes the executives successful use of power and influence to direct the activities of others when pursuing an organization's goals - spend most of their time in face to face meetings

rivalry among existing competitors

- describes the intensity with which companies within the same industry jockey for market share and profitability

competition

- describes the struggle among these forces (buyers, suppliers, potential new entry of other firms, and the threat of substitutes) to capture as much of the economic value created in an industry as possible

mission

- description of what an organization actually does, that is, the products and services it plans to provide, and the markets in which it will compete - uses the word "by"

currency exchange rate

- determines how many dollars one must pay for a unit of foreign currency

profit/producer surplus

- difference between the price charged and the cost to produce profit = P - C

industry growth

- directly affects the intensity of rivalry among competitors - in periods of high growth, consumer demand rises and price competition among firms frequently decreases

activities

- distinct actions that enable firms to add incremental value at each step by transforming inputs into goods and services

activities

- distinct and fine grained business processes that enable firms to add incremental value by transforming inputs into goods and services

dollar depreciates

- dollar decreases in value - takes more dollars to buy foreign currency and foreign imports are thus more expensive for US buyers

dollar appreciates

- dollar increases in value; need more of the foreign currency to buy a dollar - This makes US exports more expensive and reduces demand for US exports overall

consolidated industry

- dominated by few firms and has the potential to be highly profitable - consolidated industries are more profitable - mergers and acquisitions make this possible (results in higher industry profitability) - e.g. US airline industry

within each strategic business unit there are various business functions

- e.g. accounting, finance, HR, PD, operations, marketing, etc. - functional managers are responsible for decisions and actions within a single functional area

four components of CSR

- economic responsibilities - legal responsibilities - ethical responsibilities - philanthropic responsibilities

1. competitive industry structure

- elements and features common to all industries - largely captured by... 1. the number and size of competitors 2. the firm's degree of pricing power 3. the type of product or service offered (commodity or differentiated product) 4. the height of entry barriers

organizational core values

- ethical standards and norms that govern the behavior of individuals within a firm or organization - have two important functions: 1. form a solid foundation on which firm can build its vision and mission, and thus lay the groundwork for longterm success 2. values serve as guardrails put in place to keep the company on track when pursuing its vision and mission in its quest for competitive advantage - they help individuals make choices that are both ethical and effective in advancing the company's goals

strategic commitments

- firm actions that are costly, long term oriented, and difficult to reverse -if firms make strategic commitments to compete in an industry, rivalry among competitors is likely to be more intense

support activities

- firm activities that add value indirectly, but are necessary to sustain primary activities - HR, information systems, accounting and finance, R&D

2. firm effects

- firm performance attributed to the actions managers take - firm effects are more important in determining firm performance

1. industry effects

- firm performance attributed to the structure of the industry in which the firm competes - the structure of an industry is determined by elements common to all industries, elements such as entry and exit barriers, number and size of companies, and types of products and services offered

primary activities

- firms activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain - e.g. supply chain management, operations, distributions, marketing and sales, after sales service

differentiation parity

- firms create the same amount of value

cost parity

- firms have the same cost

economic responsibilities

- first and foremost a business enterprise is an economic institution - e.g. investors expect an adequate return for their risk of capital, creditors expect the firm to repay its debts, etc.

corporate executives

- formulate corporate strategy at headquarters - need to decide which industries, markets, and geographies their companies should compete - responsible for setting overarching strategic objectives and allocating scarce resources among different business divisions, monitoring performance, and making adjustments to the overall portfolio of businesses as needed

perfect competition

- fragmented with many small firms - firms are price takers - commodity product - low entry barriers

stock price

- generally only increases if the firm's rate of growth exceeds investors expectations

generic business strategies

- generic because they can be used in any industry context 1. differentiation strategy 2. cost leadership strategy

differentiation strategy

- generic business strategy that seeks to create higher value for customers than the value that competitors create

cost leadership strategy

- generic business strategy that seeks to create the same or similar value for customers at a lower cost

6. government policy

- government policies may restrict or prevent new entrants

natural monopolies

- governments let these exist

strategy canvas

- graphical depiction of a company's relative performance vis a vis its competitors across the industry's key success factors

core values statement

- guide an organization to achieve its vision and fulfill its mission - applies to internal conduct and external interaction - can include ethical considerations

value curve

- horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action - value curve that zigzags across the strategy canvas indicates a lack of effectiveness in its strategic profile: want a curve with focus

first step of the strategic management process

- identify the company's vision, mission, and values

how to map industry competitors into strategic groups

- identify the most important strategic dimensions such as expenditures on R&D, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service - choose two key dimensions for the horizontal and vertical axes: the dimensions chosen for the axes should not be highly correlated - graph the firms in the strategic group, indicating each firm's market share by the size of the bubble with which it is represented

black swan events

- incidents that describe highly improbable but highly impactful events - e.g. fall of the Berlin Wall, Enron, 9/11 terrorist attcks - several black swan events eroded the public's trust in business as an institution and capitalism as an economic system

external stakeholders

- include customers, suppliers, alliance partners, creditors, unions, communities, governments at various levels, and the media

internal stakeholders

- include stockholder, employees, and board members

6. legal factors

- include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions, all which can have a direct bearing on a firm's profit potential

total returns to shareholders

- includes stock price appreciation plus dividends received over a specific period - unlike accounting data, total return to shareholders is an external and forward looking performance metric - it essentially indicates how the stock market views all available public information about a firm's past state, current state, and expected future performance

diseconomies of scale

- increases in cost per unit when output increases

3. switching costs

- incurred by moving from one supplier to another - are not time sunk costs

shareholders

- individuals or organizations that own one or more shares of stock in a public company - the legal owners of public companies

mobility barriers

- industry specific factors that separate one strategic group from another - restrict movement between groups

5. ecological factors

- involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth - organizations and the natural environment coexist in an interdependent relationship

3. learning curve

- it takes less and less time to produce the same output as we learn how to be more efficient; learning by doing drives down cost - the steeper the learning curve, the.more learning has taken place - the learning curve effect is driven by increasing cumulative output within the existing technology over time - the speed of learning determines the slope of the learning curve or how steep the learning curve is

red oceans

- known as the market space of existing industries

2. economic factors

- largely macroeconomic, affecting economy wide phenomena - macroeconomic factors: 1. growth rates 2. levels of employment 3. interest rates 4. price stability (inflation and deflation) 5. currency exchange rates

legal responsibilities

- laws and regulations are a society's codified ethics, embodying notions of right and wrong

non market strategies

- lobbying, public relations, contributions and so on - do these actions in favor of the firm to help its political factors

ethical responsibilities

- managers are often called upon to go beyond what is required by law - they embody the full scope of expectations, norms, and values of its stakeholders

importance of analyzing the external environment

- managers can mitigate threats - managers can leverage opportunities - gain understanding of potential impacts - understand the source/proximity of factors

porter's give key competitive forces

- managers need to consider these forces when analyzing the industry environment and formulating competitive strategy 1. threat of entry 2. power of suppliers 3. power of buyers 4. threat of substitutes 5. rivalry among existing competitors

2. identify stakeholders' interests

- managers need to specify and assess the interests and claims of the pertinent stakeholders using the power, legitimacy, and urgency criteria

strategic positioning

- managers stake a unique position within an industry that allows the firm to provide value to customers, while controlling costs - e.g. low prices and power service vs. high prices and good service - requires tradeoffs

monopolistic competition

- many firms - some pricing power - differentiated product - medium entry barriers

non price competition

- means of competing by offering unique product features or services rather than competing based on price alone - preferred mode of competition

substitutes

- meet the same basic customers needs as the industry's product but in a different way

strategic management process

- method put in place by strategic leaders to formulate and implement a strategy, which can lay the foundation for a sustainable competitive advantage

process innovation

- new method of technology to produce an existing product

4. experience curve

- now change the underlying technology while holding cumulative output constant - process innovation - allows a firm to leapfrog to a steeper learning curve thereby driving down its per unit costs

entry barriers

- obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential - advantageous for incumbent firms

exit barriers

- obstacles that determine how easily a firm can leave an industry - an industry with low exit barriers is more attractive because it allows underperforming firms to exit more easily

backward integration

- occurs when a buyer moves upstream in the industry value chain, into the seller's business

philanthropic responsibilities

- often subsumed under the idea of corporate citizenship, reflecting the notion of voluntarily giving back to society

monopoly

- one firm - considerable pricing power - unique product - very high entry barriers

external factors in the firm's task environment

- ones that managers do have some influence over, such as the composition of their strategic groups (a set of close rivals) or the structure of the industry

external factors in general environment

- ones that managers have little direct control over, such as macroeconomic factors - e.g. intrest or currency exchange rates

stakeholders

- organizations, groups, and individuals that can affect or are affected by a firm's actions - they have a vested claim or interest in the performance and continued survival of the firm - two types: internal and external

level 3 leader

- organize people and resources to accomplish predetermined objectives

sustainable competitive advantage

- outperforming competitors or the industry average over a prolonged period of time

minimum efficient scale (MES

- 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

competitive parity

- performance of two or more firms at the same level

7. credible threat of retaliation

- potential new entrants must anticipate how incumbent firms will react - E.g. price wars, increased product and service innovation, advertising, sales promotions, litigation

values

- principles to guide behavior - employees at all levels can use them - helps deal with complexity and conflict - provides employees with a moral compass

substitution

- provide a comparable product or service

freemium

- provides the basic features of a product or service free of charge, but charges the user for premium services such as advanced features or add ons

pay as you go

- users pay for only the services they consume - e.g. utilities providing power and water

2. intangible resources

- resources that do not have physical attributes and thus are invisible - E.g. culture, knowledge, brand equity, reputation, and intellectual property

1. tangible resources

- resources that have physical attributes and thus are visible - E.g. labor, capital, land, buildings, plant, equipment, supplies

1. political factors

- result from the processes and actions of government bodies that can influence the decisions and behavior of firms - to influence this realm, they apply non market strategies

focused cost leadership strategy

- same as the cost-leadership strategy except with a narrow focus on a niche market

focused differentiation strategy

- same as the differentiation strategy except with a narrow focus on a niche market

economies of scope

- savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology

wholesale

- sell product to retailers at a fixed price; retailers are then free to set their own price on the product and profit the difference between their selling price and the cost to buy the product

bundling

- sells products or services for which demand is negatively correlated at a discount - demand for two products is negatively correlated if a user values one product more than another

1. better expectations of future resource value

- sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate - I.e. when a company consistently has better expectations about the future value of resources

autonomous actions

- strategic initiatives undertaken by lower level employees on their own volition and often in response to unexpected situations

business strategy diamond

- strategy has five elements 1. arenas 2. vehicles 3. differentiators 4. staging 5. economic logic

the balanced scorecard

- strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals

scenario planning

- strategy planning activity in which top management envisions different what if scenarios to anticipate plausible futures in order to derive strategic responses - This allows the strategic management process to be more flexible and more effective than the more static strategic planning approach with one master plan

strategy as 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 - when a firm's realized strategy is a combination of top down strategic intent and bottom up emergent strategies

competitive advantage

- superior performance relative to other competitors in the same industry or the industry average

shareholder activists

- tend to buy equity stakes in a corporate that they believe is underperforming to put public pressure on a company to change its strategy - shareholder activists have much power over a firm

Real interest rates

- the amount that creditors are paid for use of their money and the amount that debtors pay for that use, adjusted for inflation - When credit is cheap because interest rates are low, consumers by larger ticket items, which fuels economic growth

organized to capture value

- the characteristic of having in place an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm's resources, capabilities, and competencies

cost

- the cost to produce the good or service matters little to the consumer, but it matters a great deal to the producer of the good or service since it has a direct bearing on the profit margin

economic value created

- the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it

consumer surplus

- the difference between the value a consumer attaches to a good or service and what he or she paid for it consumer surplus = V - P

value

- the dollar amount a consumer attaches to a good or service - the consumer's maximum willingness to pay

3. planet

- the ecological dimension emphasizes the relationship between business and the natural environment

1. profits

- the economic dimension captures the necessity of businesses to be profitable to survive

resource stocks

- the firm's current level of intangible resources

resource flows

- the firm's level of investments to maintain or build a resource

shortcomings of top down strategic planning

- the formulation of strategy is separate from implementation, and thinking about strategy is separate form doing it - information flows only one way (from top down) - we simply cannot know the future

business level strategy

- the goal directed actions managers take in their quest for competitive advantage when competing in a single product market - it may involve a single product or group of similar products that use the same distribution channel

economic contribution

- the greater the difference between value creation and cost, the greater the firm's economic contribution and the more likely it will gain competitive advantage

efficient market hypothesis

- the idea that all available information about a firm's past, current state, and expected future performance is embedded in the market price of the firm's stock

threat of substitutes

- the idea that products or services available from outside the given industry will come close to meeting the needs of current customers

razor-razorblades

- the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods - the company makes its money on the replacement part needed

strategic management

- the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage - the AFI strategy framework embodies this view of strategic management

value chain

- the internal activities a firm engages in when transforming inputs into outputs; each activity adds incremental value

price stability

- the lack of change in price levels of goods services - price stability is rare:

profit potential

- the level of profitability that can be expected for the average firm in the industry

reservation price

- the maximum price a consumer 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 equity share in a company - it cannot be recovered if the firm goes bankrupt

intended strategy

- the outcome of a rational and structured top down strategic plan

strategy implementation

- the part of the strategic management process that concerns the organization, coordination, and integration of how work gets done

strategy formulation

- the part of the strategic management process that concerns the strategy in terms of where and how to compete

threat of entry

- the risk that potential competitors will enter the industry - potential new entry depresses industry profit potential

strategic group

- the set of companies that pursue a similar strategy within a specific industry - rivalry among firms within the same strategic group is generally more intense than the rivalry among strategic groups - the number of different business strategies pursued within an industry determines the number of strategic groups in that industry ( often two: low cost, differentiation)

value innovation

- the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for the firm and the consumers; a cornerstone of blue ocean strategy

scope of competition

- the size, narrow or broad, of the market in which a firm chooses to compete

2. people

- the social dimension emphasizes the people aspect - e.g. caring for employees

dominant strategic plan (in scenario planning)

- the strategic option that top managers decide most closely matches the current reality and which is then executed

threat of substitutes is high when

- the substitute offers an attractive price performance trade off - the buyer's cost of switching to the substitute is low

the relative bargaining power of suppliers is high when

- the suppliers industry is more concentrated than the industry it sells to - suppliers do not depend heavily on the industry for a large portion of their revenues - incumbent firms face significant switching costs when changing suppliers - suppliers offer products that are differentiated - there are no readily available substitutes for the products or services that the suppliers offer - suppliers can credibly threaten to forward integrate the industry

strategic coherence

- the symmetrical co-alignment of the five elements of a firm's strategy - the congruence of policies in function with these 5 elements - the overarching fit of various businesses under the corporate umbrella

2. network effects

- the value of a product or service for an individual user increases with the number of total users - the threat of potential entry is reduced when network effects are present

opportunity costs

- the value of the best forgone alternative use of the resources employed - all costs, including opportunity costs, must be considered when taking the economic value creation perspective

resource allocation process

- the way a firm allocates its resources based on predetermined policies, which can be critical in shaping its realized strategy

VRIO framework

- theoretical framework that explains and predicts firm level competitive advantage - A firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria - resources in the VRIO framework are broadly defined to include any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing a strategy

the power of buyers is high when

- there are a few buyers and each buyer purchases large quantities relative to the size of a single seller - the industry's products are standardized and undifferentiated commodities - buyers face low or no switching costs - buyers can credibly threaten to backwardly integrate the industry

near monopolies

- these are firms that have accrued significant market power; firms that have accomplished product differentiation to such a degree that they are in a class by themselves, just like a monopolist

competitive advantage is always relative, not absolute

- to assess competitive advantage, we compare firm performance to a benchmark

inflation

- too much money chasing too few goods - when there is too much money in an economy, we tend to see rising prices - this tend to go with lower economic growth

competitive disadvantage

- underperformance relative to other competitors in the same industry or the industry average

core competencies

- unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage

subscription

- users pay for access to a product or service whether they use the product or service during the payment term or not

when assessing competitive advantage by measuring accounting profitability...

- we use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets

4. identify social responsibilities

- what economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?

1. identify stakeholders

- who are our stakeholders? - focuses on stakeholders that currently have, or potentially can have, a material effect on a company

5. address stakeholder concerns

- would should we do to effectively address any stakeholder concerns?

traditional frameworks to measure and assess firm performance

1. accounting profitability 2. shareholder value creation 3. economic value creation

managers must be able to...

1. accurately assess the performance of their firm 2. compare and benchmark their firm's performance to other competitors in the same industry or against the industry average

limitations of accounting data

1. all accounting data are historical and thus backward looking 2. accounting data does not consider off balance sheet items 3. accounting data focuses mainly on tangible assets, which are no longer the most important

strategic initiatives can bubble up from deep within a firm through (emergent strategies)

1. autonomous actions 2. serendipity 3. resource allocation process

examples of isolating mechanisms

1. better expectations of future resource value 2. path dependence 3. casual ambiguity 4. social complexity 5. IP protection

dynamic nature of business models

1. combining business models 2. evolution 3. disruption 4. response to disruption 5. legal conflicts

advantages of balanced scorecard: allows managers to...

1. communicate and link the strategic vision to responsible parties within the organization 2. translate the vision into measurable operational goals 3. design and plan business processes 4. implement feedback and organizational learning to modify and adapt strategic goals when indicated

rivalry among existing competitors is largely determined by the following factors

1. competitive industry structure 2. industry growth 3. strategic commitments 4. exit barriers

break down strategy formulation and implementation into three distinct areas

1. corporate strategy 2. business strategy 3. functional strategy

most important cost drivers to keep costs low

1. cost of input factors 2. economies of scale 3. learning curve effects 4. experience curve effects

the economic value creation framework shows that strategy is about

1. creating economic value 2. capturing as much of it as possible

limitations of economic value creation

1. determining the value of a good in the eyes of consumers is not a simple task - if a firm is able to charge the reservation price, it captures all the economic value created 2. value of a good in the eyes of consumers changes based on income, preferences, time, and other factors 3. to measure firm level competitive advantage, we must estimate the economic value created for all products and services offered by the firm ***difficult to get hard numbers with this perspective

ways to imitate

1. direct imitation 2. substitution 3. combining imitation and substitution

incumbent firms can benefit from several important sources of entry barriers

1. economies of scale 2. network effects 3. customer switching costs 4. capital requirements 5. advantages independent of size 6. government policy 7. credible threat of retaliation

the AFI strategy framework does two things

1. explains and predicts differences in firm performance 2. helps managers formulate and implement a strategy that can result in superior performance

the balanced scorecard answers four key questions and developing appropriate metrics to assess objectives

1. how do customers view us? - focus on speed, quality, service, and cost 2. how do we create value? - focus on business processes and structures that allow firm to create economic value 3. what core competencies do we need? - identify competences needed to achieve objectives 4. how do shareholders view us? - i.e. the shareholder's view of financial performance

five step process of stakeholder impact analysis

1. identify stakeholders 2. identify stakeholder's interests 3. identify opportunities and threats 4. identify social responsibilities 5. address stakeholder concerns

firm performance is determined by primarily two factors

1. industry effect 2. firm effects

disadvantages of the balanced scorecard

1. it is a tool for strategy implementation, not strategy formulation 2. only provides limited guidance for what metrics to choose (accounting profitability, shareholder value creation, and economic value creation all might be useful metrics) - different situations call for different metrics 3. the balanced scorecard is only as good as the skills of the managers who use it - devise strategy, translate strategy into objectives, make those objectives have metrics to measure performance

four main competitive industry structures

1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly

The PESTEL model groups the factors in the firm's general environment into six segments

1. political 2. economic 3. sociocultural 4. technological 5. ecological 6. legal

in each step in the stakeholder impact analysis, pay attention to three stakeholder attributes (helps prioritize certain stakeholders)

1. power 2. legitimacy 3. urgency

most salient value drivers

1. product features 2. customer service 3. complements

triple bottom line (the three P's)

1. profits 2. people 3. planet

popular business models

1. razor-razorblades 2. subscription 3. pay as you go 4. freemium 5. wholesale 6. agency 7. bundling

two assumptions in the resource based model

1. resource heterogeneity 2. resource immobility

companies develop core competencies through the interplay of resources and capabilities

1. resources - any assets that a firm can draw on when formulating and implementing a strategy (can be tangible or intangible) 2. capabilities - organizational and managerial skills necessary to orchestrate a diverse set of resources and deeply them strategically (intangible)

profitability ratios commonly used in management

1. return on invested capital (ROIC) 2. return on equity (ROE) 3. return on assets (ROA) 4. return on revenue (ROR) or profit margin

economies of scale allow firms to

1. spread their fixed costs over a larger output 2. employ specialized systems and equipment 3. take advantage of certain physical properties

limitations of shareholder value creation

1. stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term 2. overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices - can be difficult to ascertain the extent to which a stock price is influenced more by external macroeconomic factors 3. stock prices frequently reflect the psychological mood of investors, which can at times be irrational - stock prices can undershoot and overshoot expectations

when strategizing for competitive advantage, managers rely on three approaches

1. strategic planning 2. scenario planning 3. strategy as planned emergence

resources fall into two categories

1. tangible 2. intangible

two integrative frameworks, combining quantitative data with qualitative assessments

1. the balanced scorecard 2. the triple bottom line

rule of thumb in Porter's five forces

1. the stronger the five forces, the lower the industry's profit potential, making the industry less attractive for competitors 2. the weaker the five forces, the greater the industry's profit potential, making the industry more attractive

criteria of an effective top management team

1. the team responds to a complex and changing environment 2. the team can manage the needs of interdependent but often diverse units, arenas, or functional areas 3. the team has a valuable and effective social network 4. the team is able to develop a coherent plan for executive succession

positive relationship between vision statements and firm performance is more likely under these circumstances

1. visions are customer oriented 2. internal stakeholders are invested in defining the vision 3. organizational structures such as compensation systems align with the firm's vision statement

economic value

= (value the firm's product or service generates) - (cost to produce it)

economic value creation

= consumer surplus + firm profit (V - C) = (V - P) + (P - C)

level 2 leader

work effectively with others as a member of a team to achieve group objectives

2. vehicles

how will we get there? - internal development? - joint ventures? - licensing/franchising? - acquisitions?

5. economic logic

how will we obtain our returns? - lowest costs through scale advantages? - lowest costs through scope and replication advantages? - premium prices due to unmatchable service? - premium prices due to proprietary product features?

3. differentiators

how will we win in the marketplace? - image? - customization? - price? - styling? - product reliability? - speed to market?

four questions to ask yourself when pursuing value innovation

lower costs 1. eliminate - which of the factors that the industry takes for granted should be eliminated? 2. reduce - which of the factors should be reduced well below the industry's standard? increase perceived consumer benefits 1. raise - which of the factors should be raised well above the industry's standard? 2. create - which factors should be created that the industry has never offered?

level 1 leader

make individual contributions through talent and work ethic

agency

the produce relies on an agent to retailer to sell the product, at a predetermined percentage commission

***competitive advantage goes to the firm that achieves the largest economic value created

two pricing options in this case: 1. charge higher prices to reflect the higher value and thus increase its profitability 2. charge the same price as competitors and gain market share

strengths threats quadrant

use an internal strength to minimize the effect of an external threat

4. staging

what will be our speed and sequence of moves? - speed of expansion? - sequence of initiatives?

1. arenas

where will we be active? - which product categories? - which market segments? - which geographic areas? - which core technologies? - which value creation stages?