Strategic Management - All questions

LO 3-1 / Generate a PESTEL analysis to evaluate the impact of external factors on the firm.

■ A firm's macroenvironment consists of a wide range of political, economic, sociocultural, technological, ecological, and legal (PESTEL) factors that can affect industry and firm performance. These external factors have both domestic and global aspects. ■ Political factors describe the influence governmental bodies can have on firms. ■ Economic factors to be considered are growth rates, interest rates, levels of employment, price stability (inflation and deflation), and currency exchange rates. ■ Sociocultural factors capture a society's cultures, norms, and values. ■ Technological factors capture the application of knowledge to create new processes and products. ■ Ecological factors concern a firm's regard for environmental issues such as the natural environment, global warming, and sustainable economic growth. ■ Legal factors capture the official outcomes of the political processes that manifest themselves in laws, mandates, regulations, and court decisions.

LO 3-2 / Differentiate the roles of firm effects and industry effects in determining firm performance.

■ A firm's performance is more closely related to its managers' actions (firm effects) than to the external circumstances surrounding it (industry effects). ■ Firm and industry effects, however, are interdependent. Both are relevant in determining firm performance.

LO 4-9 / Identify competitive advantage as residing in a network of distinct activities.

■ A strategic activity system conceives of a firm as a network of interconnected firm activities. ■ A network of primary and supporting firm activities can create a strategic fit that can lead to a competitive advantage. ■ To sustain a competitive advantage, firms need to hone, fine-tune, and upgrade their strategic activity systems over time, in response to changes in the external environment and to moves of competitors.

LO 3-8 / Generate a strategic group model to reveal performance differences between clusters of firms in the same industry.

■ A strategic group is a set of firms within a specific industry that pursue a similar strategy in their quest for competitive advantage. ■ Generally, there are two strategic groups in an industry based on two different business strategies: one that pursues a LOW-COST strategy and a second that pursues a DIFFERENTIATION STRATEGY. ■ Rivalry among firms of the same strategic group is more intense than the rivalry between strategic groups: intra-group rivalry exceeds inter-group rivalry. ■ Strategic groups are affected differently by the external environment and the five competitive forces. ■ Some strategic groups are more profitable than others. ■ Movement between strategic groups is restricted by mobility barriers—industry-specific factors that separate one strategic group from another.

LO 6-6 / Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

■ A successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled. ■ A blue ocean strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. ■ When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being "stuck in the middle." They then succeed at neither business strategy, leading to a competitive disadvantage.

LO 2-4 / Describe the roles of vision, mission, and values in a firm's strategy.

■ A vision captures an organization's aspirations. An effective vision inspires and motivates members of the organization. ■ A mission statement describes what an organization actually does—what its business is— and why and how it does it. ■ Core values define the ethical standards and norms that should govern the behavior of individuals within the firm.

LO 6-1 / Define business-level strategy and describe how it determines a firm's strategic position.

■ Business-level strategy determines a firm's strategic position in its quest for competitive advantage when competing in a single industry or product market. ■ Strategic positioning requires that managers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost. ■ Differentiation and cost leadership are distinct strategic positions. ■ Besides selecting an appropriate strategic position, managers must also define the scope of competition—whether to pursue a specific market niche or go after the broader market.

LO 3-5 / Describe the strategic role of complements in creating positive-sum co-opetition.

■ Co-opetition (cooperation among competitors) can create a positive-sum game, resulting in a larger pie for everyone involved. ■ Complements increase demand for the primary product, enhancing the profit potential for the industry and the firm. ■ Attractive industries for co-opetition are characterized by high entry barriers, low exit barriers, low buy

LO 4-2 / Differentiate among a firm's core competencies, resources, capabilities, and activities.

■ Core competencies are unique, deeply embedded, firm-specific strengths that allow companies to differentiate their products and services and thus create more value for customers than their rivals, or offer products and services of acceptable value at lower cost. ■ Resources are any assets that a company can draw on when crafting and executing strategy. ■ Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources to deploy them strategically. ■ Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services.

LO 2-3 / Compare and contrast the roles of corporate, business, and functional managers in strategy formulation and implementation.

■ Corporate executives must provide answers to the question of where to compete, whether in industries, markets, or geographies, and how to create synergies among different business units. ■ General managers in strategic business units must answer the strategic question of how to compete in order to achieve superior performance. They must manage and align the firm's different functional areas for competitive advantage. ■ Functional managers are responsible for implementing business strategy within a single functional area.

LO 2-9 / Compare and contrast devil's advocacy and dialectic inquiry as frameworks to improve strategic decision making.

■ Devil's advocacy and dialectic inquiry are two techniques to improve strategic decision making. ■ Devil's advocacy is a technique that can help to improve strategic decision making; a key element is that of a separate team or individual carefully scrutinizing a proposed course of action by questioning and critiquing underlying assumptions and highlighting potential downsides. ■ Dialectic inquiry is a technique that can help to improve strategic decision making; the key element is that two teams generate detailed but alternate plans of action (thesis and antithesis). The goal, if feasible, is to achieve a synthesis between the two plans.

LO 2-6 / Justify why anchoring a firm in ethical core values is essential for longterm success.

■ Ethical core values underlay the vision statement to ensure the stability of the strategy, and thus lay the groundwork for long-term success. ■ Ethical core values are the guardrails that help keep the company on track when pursuing its mission and its quest for competitive advantage.

LO 2-1 / Explain the role of strategic leaders and what they do.

■ Executives whose vision and decisions enable their organizations to achieve competitive advantage demonstrate strategic leadership. ■ Strategic leaders use formal and informal power to influence the behavior of other organizational members to do things, including things they would not do otherwise. ■ Strategic leaders can have a strong (positive or negative) performance impact on the organizations they lead.

LO 4-5 / Apply the VRIO framework to assess the competitive implications of a firm's resources.

■ For a firm's resource to be the basis of a competitive advantage, it must have VRIO attributes: valuable (V), rare (R), and costly to imitate (I). The firm must also be able to organize (O) in order to capture the value of the resource. ■ A resource is valuable (V) if it allows the firm to take advantage of an external opportunity and/or neutralize an external threat. A valuable resource enables a firm to increase its economic value creation (V − C). ■ A resource is rare (R) 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. ■ A resource is costly to imitate (I) if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost. ■ The firm is organized (O) to capture the value of the resource if it has an effective organizational structure, processes, and systems in place to fully exploit the competitive potential.

LO 4-10 / Conduct a SWOT analysis to generate insights from external and internal analysis and derive strategic implications.

■ Formulating a strategy that increases the chances of gaining and sustaining a competitive advantage is based on synthesizing insights obtained from an internal analysis of the company's strengths (S) and weaknesses (W) with those from an analysis of external opportunities (O) and threats (T). ■ The strategic implications of a SWOT analysis should help the firm to leverage its internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats.

LO 3-7 / Appraise the role of industry dynamics and industry convergence in shaping the firm's external environment.

■ Industries are dynamic—they change over time. ■ Different conditions prevail in different industries, directly affecting the firms competing in these industries and their profitability. ■ In industry convergence, formerly unrelated industries begin to satisfy the same customer need. Such convergence is often brought on by technological advances.

LO 5-2 / Apply shareholder value creation to assess and evaluate competitive advantage.

■ Investors are primarily interested in total return to shareholders, which includes stock price appreciation plus dividends received over a specific period. ■ Total return to shareholders is an external performance metric; it indicates how the market views all publicly available information about a firm's past, current state, and expected future performance. ■ Applying a shareholders' perspective, key metrics to measure and assess competitive advantage are the return on (risk) capital and market capitalization. ■ Stock prices can be highly volatile, which makes it difficult to assess firm performance. Overall macroeconomic factors have a direct bearing on stock prices. Also, stock prices frequently reflect the psychological mood of the investors, which can at times be irrational. ■ Shareholder value creation is a better measure of competitive advantage over the long term due to the "noise" introduced by market volatility, external factors, and investor sentiment.

LO 5-5 / Apply a triple bottom line to assess and evaluate competitive advantage.

■ Noneconomic factors can have a significant impact on a firm's financial performance, not to mention its reputation and customer goodwill. ■ Managers are frequently asked to maintain and improve not only the firm's economic performance but also its social and ecological performance. ■ Three dimensions—economic, social, and ecological, also known as profits, people, and planet—make up the triple bottom line. Achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time. ■ A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions. ■ Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities in as serious a way as they track its financial performance. ■ The triple-bottom-line framework is related to 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.

LO 2-5 / Evaluate the strategic implications of product-oriented and customer oriented vision statements.

■ Product-oriented vision statements define a business in terms of a good or service provided. ■ Customer-oriented vision statements define business in terms of providing solutions to customer needs. ■ Customer-oriented vision statements provide managers with more strategic flexibility than product-oriented missions. ■ To be effective, visions and missions need to be backed up by hard-to-reverse strategic commitments and tied to economic fundamentals.

LO 4-6 / Evaluate different conditions that allow a firm to sustain a competitive advantage.

■ Several conditions make it costly for competitors to imitate the resources, capabilities, or competencies that underlie a firm's competitive advantage: (1) better expectations of future resource value, (2) path dependence, (3) causal ambiguity, (4) social complexity, and (5) intellectual property (IP) protection. ■ These barriers to imitation are isolating mechanisms because they prevent rivals from competing away the advantage a firm may enjoy.

LO 4-1 / Explain how shifting from an external to internal analysis of a firm can reveal why and how internal firm differences are the root of competitive advantage.

■ Since companies that compete in the same industry face similar external opportunities and threats, the source of the observable performance difference must be found inside the firm. ■ Looking inside a firm to analyze its resources, capabilities, and core competencies allows strategic leaders to understand the firm's strengths and weaknesses. ■ Linking the insights from a firm's external analysis to the ones from an internal analysis allows managers to determine their strategic options. ■ Strategic leaders want to leverage their firms' internal strengths to exploit external opportunities and to mitigate internal weaknesses and external threats.

LO 4-3 / Compare and contrast tangible and intangible resources.

■ Tangible resources have physical attributes and are visible. ■ Intangible resources have no physical attributes and are invisible. ■ Competitive advantage is more likely to be based on intangible resources.

LO 5-4 / Apply a balanced scorecard to assess and evaluate competitive advantage.

■ The balanced-scorecard approach attempts to provide a more integrative view of competitive advantage. ■ Its goal is to harness multiple internal and external performance dimensions to balance financial and strategic goals. ■ Managers develop strategic objectives for the balanced scorecard by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us?

LO 3-4 / Examine how competitive industry structure shapes rivalry among competitors.

■ The competitive structure of an industry is largely captured by the number and size of competitors in an industry, whether the firms possess some degree of pricing power, the type of product or service the industry offers (commodity or differentiated product), and the height of entry barriers. ■ A perfectly competitive industry is characterized by many small firms, a commodity product, low entry barriers, and no pricing power for individual firms. ■ A monopolistic industry is characterized by many firms, a differentiated product, medium entry barriers, and some pricing power. ■ An oligopolistic industry is characterized by few (large) firms, a differentiated product, high entry barriers, and some degree of pricing power. ■ A monopoly exists when there is only one (large) firm supplying the market. In such instances, the firm may offer a unique product, the barriers to entry may be high, and the monopolist usually has considerable pricing power.

LO 4-4 / Evaluate the two critical assumptions about the nature of resources in the resource-based view.

■ The first critical assumption—resource heterogeneity—is that bundles of resources, capabilities, and competencies differ across firms. The resource bundles of firms competing in the same industry (or even the same strategic group) are unique to some extent and thus differ from one another. ■ The second critical assumption—resource immobility—is that resources tend to be "sticky" and don't 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.

LO 6-4 / Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five forces that shape competition.

■ The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability. ■ Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage. ■ Exhibit 6.8 details the benefits and risks of each business strategy.

LO 6-3 / Examine the relationship between cost drivers and cost-leadership strategy.

■ The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors. ■ In a cost-leadership strategy, the focus of competition is achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value. ■ Some of the unique cost drivers that managers can manipulate are the cost of input factors, economies of scale, and learning- and experience-curve effects. ■ No matter how low the price, if there is no acceptable value proposition, the product or service will not sell.

LO 6-2 / Examine the relationship between value drivers and differentiation strategy.

■ The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features. ■ In a differentiation strategy, the focus of competition is on value-enhancing attributes and features, while controlling costs. ■ Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements. ■ Value drivers contribute to competitive advantage only if their increase in value creation (∆V) exceeds the increase in costs, that is: (∆V) > (∆C).

LO 3-6 / Explain the five choices required for market entry.

■ The more profitable an industry, the more attractive it becomes to competitors, who must consider the who, when, how, what, and where of entry. ■ The five choices constitute more than parts of a single decision point; their consideration forms a strategic process unfolding over time. Each choice involves multiple decisions including many dimensions. ■ WHO includes questions about the full range of stakeholders, and not just competitors; WHEN, questions about the industry life cycle; HOW, about overcoming barriers to entry; WHAT, about options among product market, value chain, geography, and business model; and WHERE, about product positioning, pricing strategy, and potential partners.

LO 3-3 / Apply Porter's five competitive forces to explain the profit potential of different industries.

■ The profit potential of an industry is a function of the five forces that shape competition: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat of substitutes, and (5) rivalry among existing competitors. ■ The stronger a competitive force, the greater the threat it represents. The weaker the competitive force, the greater the opportunity it presents. ■ A firm can shape an industry's structure in its favor through its strategy

LO 5-3 / Explain economic value creation and different sources of competitive advantage.

■ The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy of cost leadership or differentiation. ■ Three components are critical to evaluating any good or service: value (V), price (P), and cost (C). In this perspective, cost includes opportunity costs. ■ Economic value created is the difference between a buyer's willingness to pay for a good or service and the firm's cost to produce it (V - C). ■ A firm has a competitive advantage when it is able to create more economic value than its rivals. The source of competitive advantage can stem from higher perceived value creation (assuming equal cost) or lower cost (assuming equal value creation).

LO 5-6 / Use the why, what, who, and how of business models framework to put strategy into action.

■ The translation of a firm's strategy (where and how to compete for competitive advantage) into action takes place in the firm's business model (how to make money). ■ A business model details how the firm conducts its business with its buyers, suppliers, and partners. ■ How companies do business is as important to gaining and sustaining competitive advantage as what they do. ■ The why, what, who, and how framework guides managers through the process of formulating and implementing a business model.

LO 4-8 / Apply a value chain analysis to understand which of the firm's activities in the process of transforming inputs into outputs generate differentiation and which drive costs.

■ The value chain 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. ■ A careful analysis of the value chain allows managers to obtain a more detailed and finegrained 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. ■ When a firm's set of distinct activities is able to generate value greater than the costs to create it, the firm obtains a profit margin (assuming the market price the firm is able to command exceeds the costs of value creation).

LO 6-5 / Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

■ To address the trade-offs between differentiation and cost leadership at the business level, managers must employ value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price, and cost. ■ Lowering a firm's costs is primarily achieved by eliminating and reducing the taken-forgranted factors on which the firm's industry rivals compete. ■ Increasing perceived buyer value is primarily achieved by raising existing key success factors and by creating new elements that the industry has not yet offered. ■ Strategic leaders track their opportunities and risks for lowering a firm's costs and increasing perceived value vis-à-vis their competitors by use of a strategy canvas, which plots industry factors among competitors (see Exhibit 6.11).

LO 2-2 / Outline how you can become a strategic leader.

■ To become an effective strategic leader, you need to develop skills to move sequentially through five leadership levels: highly capable individual, contributing team member, competent manager, effective leader, and executive ■ The Level-5 strategic leadership pyramid applies to both distinct corporate positions and personal growth.

LO 5-1 / Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.

■ To measure competitive advantage, we must be able to (1) accurately assess firm performance, and (2) compare and benchmark the focal firm's performance to other competitors in the same industry or the industry average. ■ To measure accounting profitability, we use standard metrics derived from publicly available accounting data. ■ Commonly used profitability metrics in strategic management are return on assets (ROA), return on equity (ROE), return on invested capital (ROIC), and return on revenue (ROR). See the key financial ratios in five tables in "How to Conduct a Case Analysis." ■ Accounting data are historical and thus backward-looking. They focus mainly on tangible assets and do not consider intangibles that are hard or impossible to measure and quantify, such as an innovation competency.

LO 4-7 / Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.

■ To sustain a competitive advantage, any fit between a firm's internal strengths and the external environment must be dynamic. ■ Dynamic capabilities allow a firm to create, deploy, modify, reconfigure, or upgrade its resource base to gain and sustain competitive advantage in a constantly changing environment.

LO 2-7 / Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence.

■ Top-down strategic planning is a sequential, linear process that works reasonably well when the environment does not change much. ■ In scenario planning, managers envision what-if scenarios and prepare contingency plans that can be called upon when necessary. ■ Strategic initiatives can be the result of top-down planning or can emerge through a bottom-up process from deep within the organization. They have the potential to shape a firm's strategy. ■ A firm's realized strategy is generally a combination of its top-down intended strategy and bottom-up emergent strategy, resulting in planned emergence.

LO 2-8 / Describe and evaluate the two distinct modes of decision making.

■ When faced with decisions, individuals tend to satisfice rather than to optimize due to cognitive limitations. ■ Our decision making is governed by two distinct ways of thinking: System 1 and System 2. ■ System 1 is our default mode of thinking because it is automatic, fast, and efficient, requiring little energy or attention. System 1 is prone to cognitive biases that can lead to systematic errors in decision making. ■ System 2 is based on attempting to apply rationality to our decision making by relying on analytical and logical reasoning. It is an effortful, slow, and deliberate way of thinking. ■ Along with cognitive limitations, as humans we are prone to a host of cognitive biases, which leads to systematic errors in our decision making when compared to a more rational decision.