BUS 499 EXAM 2
Define Macro environment→
encompasses the broad environmental context in which a company is situated and is comprised of six principal components
Best-cost provider strategy
giving customers more value for the money by satisfying buyers' expectations on key quality/features/performance/service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best)costs and prices among sellers offering products with comparable differentiating attributes.
Intangible Resources:
human assets and intellectual capital; brand, image, and reputational assets; relationships; company culture
Strategic Group
is a cluster of industry rivals that have similar competitive approaches and market positions
resource
is a competitive asset that is owned or controlled by a company.
Cost Driver
is a factor having a strong effect on the cost of a company's value chain activities and cost structure
Strategic Group mapping
is a technique for graphically displaying the different market or competitive positions that rival firms occupy in the industry
Define uniqueness drive
is a value chain activity or factor that can have a strong effect on customer value and creating differentiation.
Customer value proposition
is established by the company's overall strategy and outlines the company's approach to creating value for its customers
competitive advantage Hinge
on how cost effectively a company can execute its customer value proposition
Tangible Resources:
physical, financial, technological, organizational
Broad differentiation strategy→
seeking to differentiate the company's product or service from rivals' in ways that will appeal spectrum of buyers. Attractive competitive approaches to use whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product or service. Involves offering differentiating features that clearly set the firm's products or services apart from rivals. Enhances Profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation that is not easily copied or matched by rivals.
capability: .
: is the capacity of a company to competently perform some internal activity. Capabilities are developed and enabled through the deployment of a company's resources.
What is the purpose of a company's business model? .
A business model sets forth how the company's strategy and operating approaches will create value for customers, while at the same time generate ample revenues to cover costs and realize profit. It's management's blueprint for delivering a valuable product/ service to customers in a manner that will yield an attractive profit.
Define and describe the term "sustainable competitive advantage"
A company achieves sustainable competitive advantage when an attractively large number of buyers develop a lasting preference for its products or services over the offerings of competitors, despite the efforts of competitors to overcome or erode its advantage. The bigger and more durable the competitive advantage, the better a company's prospects for winning in the marketplace and earning superior long term profits relative to rivals.
Distinctive competency
A competency unique to to a business organization, a competency superior in some aspect than the competencies of the other organizations.
Focused differentiation strategy
Advantage from offering niche members customized attributes that meet their tastes and requirements better than rivals (e.g., Louis Vuitton & Rolex)
Focused low-cost strategy
Advantage from serving niche members at a lower price (e.g., private-label—or generic—food manufacturers & NYC makeup)
Broad differentiation strategy
Advantage over rivals from differentiating by anything other than low cost (e.g., Johnson & Johnson/ product reliability & Apple/ product innovation)
The Five Forces: (multiple questions) figure 3.1
-Competitive pressures stemming from buyer bargaining power(figure 3.3) -Competitive pressures coming from companies in other industries to win buyers over to substitute products. (Figure 3.4) -Competitive pressures stemming from supplier bargaining power(Figure 3.5) -Competitive pressures associated with the threat of new entrants into the market (Figure 3.6) -Competitive pressures associated with rivalry among competing sellers to attract customers.
Be able to define each of the five generic strategies.
Broad low-cost provider strategy Broad differentiation strategy Focused low-cost strategy Focused differentiation strategy→ Best-cost provider strategy→
Cutthroat (Brutal)
Competitors engage in protracted price wars or habitually employ other aggressive tactics that are mutually destructive to profitability
What risks are associated with a focused strategy (p.108)
Competitors will find effective ways to match a focuser's capabilities in serving the target niche. The preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.
How does a firm revamp the value chain to increase differentiation (pp.102- 103)?
Coordinating with downstream channel allies to enhance customer value Coordinating with upstream suppliers to better address customer needs
strategic vision
Distinguish between a strategic vision and mission statement. Strategic vision describes "where are we going" -- the course and direction management has charted and the company's future product-customer-market-technology focus. Strategic vision is a company's FUTURE business scope while the mission statement describes the company's PRESENT business and purpose.
Which three ways can a firm deliver superior value via a differentiation strategy?
Include product attributes and user features that lower the buyer's costs Incorporate tangible features that improve product performance Incorporate intangible features that enhance buyers satisfaction in non economic ways
What is the basis for competitive advantage
Overall lower costs than competitors
key success factors
are those competitive factors that most affect the ability of all firms in an industry to prosper.
Factors that determine a firm's prospects for attractive future profits in its industry include:
Both the firm's and its industry's growth potential Effects of internal industry competition Effects of prevailing and future driving forces The firm's competitive position in its industry in relation to its rivals The firm's competence in performing the industry's key success factors
List the four circumstances where a differentiation strategy works best (p.104).
Buyer needs and uses of the product are diverse. There are many ways to differentiate the product or service that have value to buyers. Few rival firms are following a similar differentiation approach. Technological change is fast-paced and competition revolves around rapidly evolving product features.
[Broad] low-cost provider strategy
Cost-based advantage over rivals (e.g., Walmart & Southwest)
What are the two elements of a company's business model?
Customer value proposition - The profit formula -
Describe the four intensities of industry rivalry
Cutthroat (Brutal) → Fierce(Strong) → Moderate(Normal) → Weak →
Core competency:
Defining capability or advantage that distinguishes a company from its competitors
Fierce(Strong)
Fierce(Strong) → The battle for market share is so vigorous that the profit margins of most industry members are squeezed to bare-bones levels.
What are some characteristics of an effectively worded vision statement (Table 2.2). →
Graphic- Paints a picture of the kind of company that management is trying to create and the market position(s) the company is striving to stake out. Directional- is forward looking; describes the strategic course that management has charted and the kinds of product-market-customer-technology changes that will help the company prepare for the future. Focused- is specific enough to provide managers with guidance in making decisions and allocating resources. Flexible- is not so focused that it makes it difficult for management to adjust to changing circumstances in markets, customer preferences, or technology. Feasible- is within the realm of what the company can reasonably expect to achieve. Desirable- indicates why the directional path makes good business sense. Easy to communicate- is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple, memorable "slogan".
List the important uniqueness drivers from figure 5.3. Also understand that uniqueness drivers are different ways for organizations to enhance differentiation.
Input quality Innovation and technological advances Product features, design, and performance Product R&D Continuous quality improvement Employee skills, training, experience Marketing and brand-building Customer service Input quality
Conditions that characterize an unattractive industry for existing competitors:
Internal rivalry among competitors is strong; low entry barriers result in entry of new competitors; intense competition from substitutes; and suppliers and customers are in strong bargaining positions.
List the four tests of competitive power to ascertain which resources and capabilities can support a sustainable competitive advantage over rival firms
Is the resource or capability competitively valuable? Is the resource or capability rare-- is it something rivals lack? Is the resource or capability inimitable or hard to copy? Is the resource or capability non substitutable or is it vulnerable to the threat of substitution from different types of resources and capabilities?
Cost Driver examples
Labor productivity and compensation costs Economies of scale Learning and experience Capacity utilization Input costs Production technology and design Communication systems and information technology Bargaining power Outsourcing or vertical integration Labor productivity and compensation cost
. Weak
Most industry members are satisfied with their sales growth and market share and rarely undertake offenses against their competitors
What two reasons account for why some positions on a strategic group map are more attractive than other positions .
No two map positions are equally attractive. Some groups are more favorably positioned than others because they confront weaker competitive forces. Industry driving forces may favor some strategic groups and hurt the prospects of others. Competitive pressures may cause the profit potential of different strategic groups to vary.
What three pitfalls should a company try to avoid when pursuing low-cost provider strategy?
Overly aggressive price cutting Price cutting results in lower margins, no increase in sales volume and lower profitability Relying on easily imitated cost reductions Becoming too fixed on cost reduction Even price sensitive buyers essential features and some level of minimum quality to be maintained Ignoring buyer interest in additional features Overlooking declining buyer sensitivity to price(e.g., fast food industry—buyers are becoming less price sensitive & more concerned with healthy eating and food quality) Technological breakthroughs can nullify cost advantages
What are the two major avenues for achieving a competitive advantage based on lower costs.
Perform essential value chain activities more cost-effectively than rivals Revamp the firm's overall value chain to eliminate or by-pass some cost-producing activities together
List the five competitive forces (Figure 3.2)
Porter's Five-Forces Model of Competition is the most powerful and widely used tool for assessing the strength of an industry's competitive forces. is built around the notion that there are FIVE primary drivers (OR forces) that contribute to competitive intensity within an industry
Recognize the following points regarding a SWOT Analysis
Positives: Strengths and Opportunities Negatives: Weaknesses and Threats
List the seven conditions when a low-cost strategy works best.
Price competition among rival sellers is especially vigorous The product of rival sellers are essentially identical and are readily available from several sellers There are few ways to achieve product differentiation that have value to buyers Buyers incur low cost in switching their purchases from one seller to another The majority of industry sales are made to a few large-volume buyers Industry newcomers use introductory low price to attract buyers and build a customer base
List common pitfalls a company should try to avoid when pursuing a differentiation strategy
Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied. Incorporating product features or attributes in which buyers see little value or are easily copied by rivals. Overspending on efforts to differentiate that erode profitability. Over-differentiating so that product quality or service levels exceed buyers' needs. Trying to charge too high a price premium. Not establishing meaningful gaps in quality or service or performance features over the products of rivals.
What three examples does the book provide as ways for a company to revamp its value chain?
Selling directly to consumers and cutting out the activities and costs of distributors and dealers. Streamlining operations by eliminating low-value-added or unnecessary work steps and activities. Improving supply chain efficiency to reduce materials handling and shipping costs.
What are the key factors of competitive success?
Specific product attributes Necessary resources, competencies, and capabilities Specific intangible assets Competitive capabilities
What is "Strategic Uniqueness" and why is it important?
Strategic Uniqueness means that a company needs to have something that makes them stand out more than their competitors that yields a competitive advantage → is a company's most reliable ticket for earning above average profits. The company needs to be different in a meaningful way. Remember TRADEOFFS → companies who strive to be better rather than different often forget about tradeoffs and they ignore underlying strategies because they want to be the best. EX: Southwest imitators
Is the strategy helping the company achieve a sustainable competitive advantage?
Strategies that fail to achieve competitive advantage over rivals are unlikely to produce superior performance. Winning strategies enable companies to achieve a competitive advantage over key rivals that are long lasting. The bigger more durable the competitive edge that the strategy helps build, the more powerful it is.
What is strategy, and what does it explain?
Strategy means a company's strategy specifies its approach to creating superior value for customers and determining how capabilities and resources will be utilized to deliver the desired value to customers. In turn, a company's strategy helps explain why the company matters in the marketplace. It explains the "HOW". It's a plan of action designed to achieve a major or overall aim.
Competitive pressures associated with rivalry among competing sellers to attract customers. This is usually the strongest of the 5 forces.(Figure 3.7)
Stronger: competing sellers are active in making fresh moves to improve their market standing, buyer demand is growing slowly, buyer demand falls off and sellers find themselves with excess capacity, buyer costs to switch brands are low Weaker: industry members aren't aggressive in drawing sales and market share away from rivals, buyer demand is growing rapidly, buyer costs to switch brands are high, products of rival sellers are strongly differentiated and customer loyalty is high
Competitive pressures coming from companies in other industries to win buyers over to substitute products. (Figure 3.4)
Stronger: good substitutes Readily available or new ones are emerging Attractively priced Comparable or better performance features End users have: Low costs in switching to substitutes Grow more comfortable with using substitutes Weaker: good substitutes are not readily available, substitutes are higher priced relative to the performance they deliver, end users have high costs in switching to substitutes
Competitive pressures stemming from supplier bargaining power(Figure 3.5)
Stronger: industry members incur high costs in switching their purchases to alternatives, need inputs are in short supply, a supplier has a differentiated input that enhances the quality, performance or image of sellers' products is a valuable part of sellers' production processes Weaker: item being supplied as "commodity" is readily available, seller switching costs to alternative suppliers are low, good substitute inputs exist, surge in availability of supplies
Competitive pressures associated with the threat of new entrants into the market (Figure 3.6)
Stronger: pool of entry candidates is large, entry barriers are low, existing industry members are looking to expand their market reach by entering product segments, newcomers can expect to earn attractive profits, buyer demand is growing rapidly Weaker: pool of entry candidates is small, entry barriers are high, existing competitors are struggling to earn good profits, industry's outlook is risky, buyer demand is growing slowly
Competitive pressures stemming from buyer bargaining power(figure 3.3)
Stronger: switching costs to competing brands or substitute products are low, buyers are large and can demand concessions when purchasing large quantities, buyer demand is weak or declining, there are only a few buyers, quantity and quality of info available to buyers improves Weaker: buyers purchase the item infrequently or in small quantities, switching costs to competing brands are high, surge in buyer demand that creates a sellers market, brand reputation is important to the buyer
What strategic moves are rivals likely to make next?
Studying competitors; past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace.
, what does successful differentiation allow a firm to accomplish?
Successful execution of a differentiation strategy allows a firm to: Command a premium price Increase its unit sales Gain buyer loyalty to its brand
Contrast the macro environment with the industry/competitive environment.
The Macro environmental factors have a low impact on the company's business situation But the macroenvironment and the industry/competitive environment are in which the company operate
What is the value of strategic group mapping?
The closer the groups are to each other on the map, the stronger the cross-group rivalry
How do you determine which resources and capabilities are important?
The competitive power of a resource or capability is measured by how many of four tests for sustainable competitive advantage it can pass These tests are often referred to as the VRIN tests for sustainable competitive advantage: Valuable, Rare, Inimitable, and Non-substitutable.
State of competition: Where are we now?
The dynamics of competition are not the same from one industry to another
What is the essence of a broad differentiation strategy?
The essence of a broad differentiation strategy is to offer unique product or service attributes If these attributes appeal to a wide range of buyers in your industry. . .the differentiation strategy is considered broad. If these attributes appeal to only a segment of the buyers in your industry... the differentiation strategy is considered focused. Sustainability (product innovation, technical superiority, product quality/reliability
What is the importance of capabilities in building and sustaining competitive advantage?
The importance is that rivals cannot readily match as it does on having a distinctive product offering. Clever rivals can nearly always copy the attributes of a popular product or service, but it is substantially more difficult for rivals to match the know-how and specialized capabilities a company has developed and perfected over a long period of time
Question 1: Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits?
The macro environment consists of the relevant factors making up the broad environmental context in which a company operates; by relevant, we mean the factors are important enough that they should shape management's decisions regarding the company's long-term direction, objectives, strategy, and business model The impact of macro environmental factors on a company's choice of strategy can be big or small Even if they change slowly or are likely to have a low impact on the company's business situation, they still merit a watchful eye. Changes in sociocultural and technological forces have begun to have strategy-shaping effects on companies Factors in the external environment have the biggest strategy shaping impact typically pertain to the company's immediate inner ring industry and competitive environment The competitive pressures brought about by the actions of rival firms The competitive effects of a buyer behavior Supplier-related competitive considerations The impact of new entrants to the industry Availability of acceptable or superior substitutes for a company's products or services
Moderate(Normal)
The maneuvering among industry members, while lively and healthy, still allows most industry members to earn acceptable profits.
Is the strategy producing good company performance?
The mark of a winning strategy is a strong company performance. Two kinds of performance improvements: 1. Gains in profitability and financial strength & 2. Advances in the company's competitive strength and market standing.
Describe perceived value and discuss the importance of signaling.
The nature of differentiation is subjective. Buyers are making a first-time purchase. Repurchase is infrequent. Buyers are unsophisticated.
What risks are associated with a focused strategy (p.108) Competitors will find effective ways to match a focuser's capabilities in serving the target niche.
The preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.
How well does the strategy fit the company's situation?
The strategy must fit competitive conditions in the industry and other aspects of the company's external environment. At the same time, it should be tailored to the company's collection of competitively important resources and capabilities.
When would a focused strategy be viable compared to a broad strategy
The target market niche is big enough to be profitable and offers good growth potential. Industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry's biggest and strongest competitors. It is costly or difficult for multi segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities. Few, if any, rivals are attempting to specialize in the same target segment.
When would a focused strategy be viable compared to a broad strategy (p.108)
The target market niche is big enough to be profitable and offers good growth potential.f Industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry's biggest and strongest competitors. It is costly or difficult for multi segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities. Few, if any, rivals are attempting to specialize in the same target segment.
List the four steps for constructing a strategic group map. Identify the competitive characteristics that delineate strategic approaches used in the industry.
Typical variables: the price/quality range (high, medium, low), geographic coverage (local, regional, national, global), degree of vertical integration (none, partial, full), product-line breadth (wide, narrow), choice of distribution channels (retail, wholesale, Internet, multiple channels), and degree of service offered (no-frills, limited, full). Plot firms on a two-variable map based upon their strategic approaches. Assign firms occupying the same map location to a common strategic group. Draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.
Define PESTEL Analysis and the six components (Table 3.1).
Understand that a PESTEL analysis is used to assess an organization's macro environment. Can be used to assess the strategic relevance of the six principal components of the macro-environment Political: tax policies, tariffs, etc. Economic: exchange rates, interest rates, inflation rate, trade deficits etc. Sociocultural: societal values, attitudes, cultural factors and lifestyles Technological: R&D consortia, technical developments etc. Environmental: weather, climate, climate change, water shortages etc. Legal forces: consumer laws, labor laws, OHSA safety regulation
What are some common shortcomings of a vision statement (Table 2.3). →
Vague or incomplete- short on specifics about where the company is headed or what the company is doing to prepare for the future. Not looking forward- doesn't indicate whether or how management intends to alter the company's current product-market-customer-technology focus. Too broad- so all-inclusive that the company could head in most any direction, pursue most any opportunity, or enter most any business. Bland or uninspiring- lacks the power to motivate company personnel or inspire shareholder confidence about the company's direction. Not distinctive- provides no unique company identity; could apply to firms in any of several industries (including rivals operating in the same market area). Too reliant on superlatives- doesn't say anything specific about the company's strategic course beyond the pursuit of such distinctions as being a recognized leader, a global or worldwide leader, or the first choice of customers.
Conditions that characterize an attractive industry for existing competitors:
Weak bargaining positions for suppliers and customers; no good substitutes; high entry barriers deterring entry of new competitors; Internal rivalry producing only moderate competitive pressure.
What three questions are crucial to understanding strategy?
Where do we want to go? (Destination) → goal/ major overall aim Where are we now? (starting point) → Internal and external analysis How are we going to get there? (turn by turn navigation) → 5 strategies
What is a vision statement?
Where is the company going, the markets to be pursued, future product/customer/customer/technology focus
: Question #1 is important because getting a handle on an industry's distinguishing economic features not only provides a broad overview of the attractiveness of the industry, but also promotes understanding of the kinds of strategic moves that industry members are likely to make. .
While the general economic conditions of the macro-environment identified through PESTEL analysis may prove to be strategically relevant, the dominant economic characteristics of the industry will have a greater bearing on the industry; prospects for growth and attractive profits.
Describe the five frequently used and dependable strategic approaches for setting a company apart from its rivals and winning a sustainable competitive advantage:
[Broad] low-cost provider strategy Broad differentiation strategy Focused low-cost strategy Focused differentiation strategy Best-cost Provider strategy
Driving Forces
are the major underlying causes of change in industry and competitive conditions (The stronger the collective impact of the 5 forces, the lower the combined profitability of industry participants The stronger the forces of competition, the harder it becomes for the industry members to earn attractive profits.)
Focused low-cost strategy→
concentrating on a narrow buyers segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price. Same as low-cost provider strategy
Focused differentiation strategy→
concentrating on a narrow buyers segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals' products. Same as broad differentiation strategy
Competitive Strategy
concerns the specifics of management's game plan (aka, focus on the HOWs) for competing successfully and securing a competitive advantage over rivals in the marketplace
The profit formula
describes the company's approach to determining a cost structure that will allow for acceptable profits given the pricing tied to its customer value proposition.
mission statement.
provides the "who we are and what we do" not the where we are going. conveys a company's purpose in language specific enough to give the company its own identity
Dynamic Capability:
s developed when a company has become proficient in modifying, upgrading, or deepening the company's resources and capabilities to sustain its competitiveness and prepare it to seize future market opportunities and nullify external threats to its well-being.
Broad low-cost provider strategy→
striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals. Has a lower cost structure than rivals-- but not necessarily that absolutely lowest possible coat. Is viewed by buyers as offering equivalent or higher value even if priced lower than competing products Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing "nonessential" activities and/or 'out-managing' rivals in performing essential activities