Strategy Exam 1

Competitive disadvantage? Competitive parity?

- competitive disadvantage: firms that generate less economic value than their rivals - competitive parity: firms that create the same economic value as their rivals

What are objectives? What is the difference between high-quality and low-quality objectives?

- Are the specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission - High-quality objectives: are tightly connected to elements of a firm's mission and are relative easy to measure and track over time - Low-quality objectives: either do not exist or are not connected to elements of a firm's mission --> Not quantitative or are difficult to measure/track over time

What is backward and forward integration (also known as "backward vertical integration" and "forward vertical integration")?

- Backward vertical integration: a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials - Forward vertical integration: When suppliers are a greater threat to firms when they can credibly threaten to enter into and begin competing in a firm's industry --> In this case, suppliers cease to be suppliers only and become suppliers AND rivals

What are business-level strategies? Corporate-level strategies? (pp. 9-10)

- Business-level strategies: actions firms take to gain a competitive advantages in a single market or industry --> 2 most common: cost leadership and product differentiation - Corporate-level strategies: actions firms take to gain a competitive advantages by operating in multiple markets or industries simultaneously

What is a harvest strategy? (p. 57)* What is divestment? (p. 58)*

- Harvest: do not expect to remain in the industry over the long term. Harvest strategy is engaging in a long, systematic, phased withdrawal, extracting as much value as possible during the withdrawal period. - Divestment: extracting a firm from a declining industry. Divestment occurs quickly, often soon after a pattern of decline has been established.

How is competitive advantage measured? What is the relationship between the different ways of measuring competitive advantage? What are the advantages and disadvantages of each way of measuring it?

- Competitive advantage is measured by examining accounting performance and the firm's economic performance. Accounting performance is measured by calculating the firm's published profit and loss and balance sheet statements. Accounting measures are easy to compute. Economic measure compares a firm's level of return to its cost of capital. - The relationship between economic and accounting measures is high. If a firm performs well using one, it will perform well in the other.

What is competitive advantage? Competitive parity? Competitive disadvantage?

- Competitive advantage is when it is able to create more economic value than rival firms - Competitive parity are firms that create the same economic value as their rivals experience - Competitive disadvantage are firms that generate less economic value than their rivals --> Can be temporary or sustained depending on duration of the disadvantage

What are customer switching costs? 1st mover advantages? 1st mover disadvantages? (pp. 51-53)*

- Customer switching costs: exist when customers make investments in order to use a firm's particular products or services. These investments make it harder for customers to begin purchasing from other firms. - 1st mover advantages: advantages that come to firms that make important strategic and technological decisions early in the development of an industry. - Disadvantages: emerging industries are characterized by a great deal of uncertainty. Retaining flexibility is a disadvantage because they use it to resolve any uncertainty by delaying decisions until the path is clear.

What is emergent, intended, realized, unrealized, and deliberate strategy?

- Emergent: theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented. - Intended: strategy a firm thought it was going to pursue. - Realized: strategy a firm is actually pursuing. - Unrealized: intended strategy a firm does not actually implement. - Deliberate: intended strategy a firm actually implements.

What is economic value?

- Is the difference between the perceived benefits gained by a customer that purchases a firm's products or services and the full economic cost of these products or services. - The firm with the higher economic value has a better competitive advantage

What is causal ambiguity? What are the 3 reasons managers might lack an understanding of the relationship between their own firm's resources/capabilities and competitive advantage?

- Is when competitors cannot tell what enables a firm to gain an advantage, that advantage may be costly to imitate. Causal ambiguity includes when competitive advantages are based on "taken-for-granted" resources and capabilities. - Reason 1: may be that the resources and capabilities that generate competitive advantage are so taken for granted. Reason 2: managers may have multiple hypotheses about which resources and capabilities enable their firm to gain competitive advantage, but they may be unable to evaluate which of them actually create the competitive advantage. Reason 3: may be that not only a few resources and capabilities enable a firm to gain competitive advantage. They might have thousands of strengths.

What is the strategic management process? What are the key elements of the strategic management process?

- It is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; a strategy that generates a competitive advantage - Key elements: mission, objectives, external & internal analysis, strategic choice, strategy implementation, competitive advantage

What is a mission? What is the difference between good, bad, indifferent mission statements?

- It is its long-term purpose - It defines both what a firm aspires to be in the long run and what it wants to avoid in the meantime - A good mission statement can improve the firms performance, a bad mission statement can hurt it and an indifferent mission statement may not affect the firms performance

What are the critical assumptions of the Resource-Based View (RBV)? What do they mean?

- RBV is a model of firm performance that focuses on the resources and capabilities controlled by a firm as sources of competitive advantage. - Resources in the RBV are defined as the tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies. - Two assumptions: can be used to describe conditions under which firms will gain competitive advantages by exploiting their resources --> Assumption of resource heterogeneity (that some resources and capabilities may be heterogeneously distributed across competing firms ) --> Assumption of resource immobility (that this heterogeneity may be long lasting)

What are resources? What are capabilities?

- Resources : the tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies --> Ex. firms factories, its products, its reputation among customers, etc - Capabilities: subset of a firm's resources and are defined as the tangible and intangible assets that enable a firm to take full advantage of the other resources it controls. --> Ex. firms marketing skills, teamwork, cooperation among its managers.

What is social complexity? What are some examples of socially complex resources?

- Socially complex phenomena, beyond the ability of firms to systematically manage and influence. The chances for others firms to imitate are significantly constrained. --> Examples: interpersonal relations among managers in the firm, a firm's culture, and a firm's reputation among suppliers and customers.

What is the difference between temporary and sustained competitive advantage? (p. 11)

- Temporary: is the competitive advantage that lasts for a very short period of time - Sustained: the competitive advantage that lasts much longer

What are unique historical conditions? What are the 2 ways in which they can give a firm sustainable competitive advantage? What are 1st mover advantages? What is path dependence?

- Unique historical conditions is when a firm gains low-cost access to resources because of its place in time and space, other firms may find these resources to be costly to imitate. - 2 ways they can give a sustainable advantage is 1st mover and path dependence. - 1st mover advantages are when a firm was the first industry to recognize and exploit an opportunity. - Path dependence is when events early in the evolution of a process have significant effects on subsequent events. Suggests that a firm may gain competitive advantage in the current period based on the acquisition and development of resources in earlier periods.

What are some examples of sub-activities included in Firm Infrastructure? Human Resource Management? Technology Development? Procurement?

- firm infrastructure: select product strategy (value proposition), accounting, legal an government affairs - human resource management: hire, train, reward employees; assign employees to positions in firm - technology development: improve assembly processes and/or develop new products to sell - procurement: decide how much and where to purchase raw materials

What are primary activities in Porter's value chain?

- inbound logistics (purchasing, inventory, etc) - production - outbound logistics (warehousing & distribution) - sales & marketing - service (dealer supporting and customer service) The goal of the five sets of activities is to create value that exceeds the cost of conducting that activity, therefore generating a higher profit

What are support activities in Porter's value chain?

- infrastructure (planning, finance, information services, legal) - technology development (research and development, product design) - human resource management and development

What is the difference between accounting and economic measures of competitive advantage?

-accounting measures: calculated by using info from firm's published profit/loss balance sheets - economic measures: compare a firm's level of return to its cost of capital instead of to the average level of return in the industry

In a manufacturing firm, what are some examples of primary activities? What are some examples of sub-activities under primary activities?

-inbound logistics: receive and store raw materials -operations: transform raw materials into quality, finished products for shipping - outbound logistics: fill orders and deliver products to customers - marketing and sales: price product and increase customer demand by promoting the product - after-sales service: product installation, warrant, parts and repairs

What are the broad categories of resources and capabilities?

1. Financial resources: all the money 2. Physical resources: all the physical technology 3. Individual(human) resources: workers in firm 4. Organizational resources: formal reporting structure

Why do you need to know about strategy? (pp. 23-24)

3 reasons why you need to know about strategy. It can give you tools you need to evaluate the strategies of firms that may employ you. Once you are working for a firm, understanding that firm's strategies and your role in implementing those strategies can be very important for personal success. Lastly, if you choose to work for smaller or entrepreneurial firms, you will easily find yourself a part of the strategic management team.

What are the 4 barriers to imitation i.e. what factors might make it costly to imitate another firm's resources/capabilities?

4 barriers to imitate are unique historical circumstances, casual ambiguity, socially complex resources and capabilities, and patents.

What elements does a firm's general environment include?

6 elements Technological change, demographic trends, cultural trends, economic climate, legal and political conditions, and specific international events.

What is an industry?

A collection of businesses with a common line of products or services

When is a resource/capability Valuable? Rare? Difficult/Costly to Imitate?

A resource is valuable and rare when they are able to conceive and engage in strategies that other firms cannot because they lack relevant resources and capabilities. They gain the first mover advantage.

What is sustained competitive advantage? Temporary competitive advantage?

A sustained competitive advantage is one that lasts a long time. Temporary advantage lasts a short time. - Sustained competitive advantage- a firm has SCA "when it is creating more economic value than the marginal firm in its industry and when other firms are unable to duplicate the benefits of this strategy" - Temporary competitive advantage- occurs when the competitive advantage achieved from a resource that is both valuable and rare is usually short lived; Competitors will quickly realize and can imitate the resource without too much trouble.

To what do accounting measures of competitive advantage compare company performance?

Accounting measures competitive advantage by using various ratios calculated from a firm's profit and loss and balance sheet statements. It is compared with the average level of accounting performance in a firm's industry.

What is tacit cooperation? (p. 88)*

Actions a firm takes that have the effect of reducing the level of rivalry in an industry and that also do not require firms in an industry to directly communicate or negotiate with each other

Why would you do a 5 forces analysis of threats in the industry environment?

Because it identifies the five most common threats faced by firms in their local competitive environments and the conditions under which these threats are more or less likely to be present.

What are barriers to entry? What is the minimum efficient scale (MES)? What is overcapacity?

Barriers to entry: attributes of an industry's structure that increase the cost of entry. The greater the cost of entry, the greater height of these barriers.

What are patents?

Can make imitation difficult, but if patents file for patent protection, they're forced to reveal a great amount of information on its product that can decrease the cost of imitation.

What are the 2 main forms of imitation?

Direct duplication of the resources and capabilities or through substitution

Quintel is a producer of computer chips. To gain an advantage over rivals, Quintel reduced its costs below all of its rivals and aligned its value chain accordingly. Recently, several of Quintel's competitors have begun to reduce the company's competitive advantage. In response to this threat, Quintel has decided to add production capacity in an effort to lower costs. By increasing production volume to reduce costs, which sources of cost advantage is Quintel pursuing?

Diseconomies of scale

To what do economic measures of competitive advantage compare company performance?

Economic compares a firm's level of return to its cost of capital. A firm's cost of capital is the rate of return it had to promise to pay to its debt and equity investors.

What are the factors (industry attributes) that generally increase the threat of each of the 5 forces?

Environmental threats

What are diseconomies of scale? (p. 38)

Exist when a firm's cost rise as a function of its volume production

T/F: Accounting measures of competitive advantage are based on fully made up information while economic measures are based on only partly made up information.

False

What are the 3 organizational components that are relevant to the question of Organization:

Formal reporting structure, management control systems, and compensation policies.

What is meant by a wedge between buyers' willingness to pay and cost?

Increase willingness to pay, decrease cost

What are cost advantages from economies of scale, managerial know-how, learning-curve effects, and favorable access to raw materials?

Incumbent firms. They act to deter new entrants.

The 5-Forces model for industry analysis is named after _______, an economist and professor of strategy.

Porter

What does Imperfectly Imitable mean?

Resources that are substantially costly to obtain or develop for competing firms

What are tactics? (p. 89)*

Specific actions a firm takes to implement its strategies

In the S-C-P model of firm performance, what do S, C and P stand for? (pp. 33-35)

Structure - Conduct - Performance. S-C-P model was turned upside down by using it to describe industries where firms could gain competitive advantages and attain above-average performance.

What activities are included in the McKinsey generic value chain?

Technology development, product design, manufacturing, marketing and distribution

What are the differences between standard micro-economic assumptions and RBV assumptions?

The RBV makes 2 assumptions. The assumption of resource heterogeneity and the resource of immobility.

What is tacit collusion? (p. 88)*

The effect of reducing supply and increasing prices

What is a value chain? What is its purpose?

The list of business activities it engages in to develop, produce, and sell its products or services. The purpose of the value chain is it can lead to important differences among the resources and capabilities controlled by different companies.

What is willingness to pay?

The maximum price a customer is willing to pay for a product/service

What is the cost of capital?

The rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm.

What is strategy?

Theory about how to gain competitive advantages - A good strategy is a strategy that actually generates such advantages - Theories need to have accurate assumptions and hypotheses in order for the strategy to allow a competitive advantage - Rarely possible to know for sure that a firm is choosing the right strategy -That is why a firm's strategy is almost always a theory

What are the 5 forces in Porter's model?

Threat of entry, threat of rivalry, threat of buyers, threat of substitutes, and threat of suppliers.

What is the purpose of the VRIO framework?

VRIO stands for four questions one must ask about a resource or capability to determine its competitive potential. The question of value, rarity, imitability, and organization.

What are the indicators (hint: not reasons) of rivalry?

When there are numerous firms in an industry and these firms tend to be roughly the same size When industry growth is slow When firms are unable to differentiate their products in an industry When production capacity is added in large increments

What are complementors?

When your customers value your product more when they have this other firm's product than when they have your product alone.

Is the firm organized to take advantage of its Valuable, Rare, and Difficult/Costly to Imitate resources/capabilities? Why are they called complementary resources and capabilities?

Yes, they're called complementary resources in that they are rarely sources of competitive advantage of their own.

What are 2nd Order Effects? What are Drivers of 1st Order Effects?

activity drivers - i.e. drivers of 1st order effects.

What are 1st Order Effects?

activity level - all of the things that effect firm profitability directly

All other things being equal, which of the following would lead to lower barriers to entry (i.e. higher threat of entry) in an industry?

raw materials are widely and readily available at a competitive price