MGMT 309 Chapter 7

What is a decentralized organization structure?

(An organization is decentralized when major decision-making responsibility is delegated to middle- and lower-level managers.)

According to Michael Porter, organizations may pursue what kind of strategies at the business level?

According to Michael Porter, organizations may pursue a 1. differentiation strategy 2. overall cost leadership strategy 3. or focus strategy

What does accounting and finance do in implementing business-level strategies?

Accounting and finance control the flow of money both within the organization and from outside sources to the organization

How is an acquisition different from a merger?

An acquisition, in contrast, occurs when one of the organizations involved is larger than the other. In most cases, the acquired firm's "identity" disappears altogether.

What is a competitive disadvantage?

An organization has a competitive disadvantage when it is not implementing valuable strategies that are being implemented by competing organizations.

What does implementing a defender strategy entail?

An organization implementing a defender strategy tries to protect its market from new competitors. It tends to downplay creativity and innovation in bringing out new products or services and to focus its efforts instead on lowering costs or improving the performance of current products.

What must organizations encourage in order to implement a prospector strategy?

An organization implementing a prospector strategy is innovative, seeks new market opportunities, and takes many risks. To implement this strategy, organizations need to encourage creativity and flexibility.

What is an overall cost leadership strategy?

An organization implementing an overall cost leadership strategy tries to gain a competitive advantage by reducing its costs below the costs of competing firms.

What is a differentiation strategy?

An organization that pursues a differentiation strategy seeks to distinguish itself from competitors through the quality (broadly defined) of its products or services.

What is a single product strategy?

An organization that pursues a single-product strategy manufactures or provides just one product or service; this product is also often sold in a single market.

What is forward vertical integration?

An organization that stops selling to one customer and sells instead to that customer's customers has diversified through forward vertical integration. G.H. Bass used forward vertical integration to diversify its operations. Bass once sold its shoes and other products only to retail outlets. More recently, however, Bass opened numerous factory outlet stores, which now sell products directly to consumers.

How does a merger facilitate diversification?

Another common way for businesses to diversify is through mergers and acquisitions—that is, through purchasing another organization. Such a purchase is called a merger when the two organizations being combined are approximately the same size.

What is a business-level strategy?

Business-level strategy is the set of strategic alternatives from which an organization chooses as it conducts business in a particular industry or market. Such alternatives help the organization focus its competitive efforts for each industry or market in a targeted and focused manner.

What is the one major strength of a single-product strategy?

By concentrating its efforts so completely on one product and market, a firm is likely to be very successful in manufacturing and marketing the product. Because it has staked its survival on a single product, the organization works very hard to make sure that the product is a success.

What can an organization do if it successfully implements an overall cost leadership strategy?

By keeping costs low, the organization can sell its products at low prices and still make a profit.

In a BCG matrix, what are cash cows?

Cash cows are businesses that have a large share of a market that is not expected to grow substantially. These businesses characteristically generate high profits that the organization should use to support question marks and stars. (Cash cows are "milked" for cash to support businesses in markets that have greater growth potential.)

When does competitive parity exist?

Competitive parity exists when large numbers of competing firms are able to implement the same strategy.

What is a corporate-level strategy?

Corporate-level strategy is the set of strategic alternatives from which an organization chooses as it manages its operations simultaneously across several industries and several markets.

What are the major disadvantages of unrelated diversification?

Despite these presumed advantages, research suggests that unrelated diversification usually does not lead to high performance. First, corporate-level managers in such a company usually do not know enough about the unrelated businesses to provide helpful strategic guidance or to allocate capital appropriately. Second, because organizations that implement unrelated diversification fail to exploit important synergies, they are at a competitive disadvantage compared to organizations that use related diversification.

What is diversification?

Diversification describes the number of different businesses that an organization is engaged in and the extent to which these businesses are related to one another.

In a BCG matrix, what are dogs?

Dogs are businesses that have a very small share of a market that is not expected to grow. Because these businesses do not hold much economic promise, the BCG matrix suggests that organizations either should not invest in them or should consider selling them as soon as possible.

What does the growth stage look like in the product life cycle?

During the growth stage, more firms begin producing the product, and sales continue to grow. Important management issues include ensuring quality and delivery and beginning to differentiate an organization's product from competitors' products. Entry into the industry during the growth stage may threaten an organization's competitive advantage; thus, strategies to slow the entry of competitors are important.

How do organizations often increase creativity and flexibility?

Organizations often increase creativity and flexibility by adopting a decentralized organization structure.

What happens when organizations exploit their distinctive competencies?

Organizations that exploit their distinctive competencies often obtain a competitive advantage and attain above-normal economic performance.

What are portfolio management techniques?

Portfolio management techniques are methods that diversified organizations use to determine which businesses to engage in and how to manage these businesses to maximize corporate performance.

In a BCG matrix, what are question marks?

Question marks are businesses that have only a small share of a quickly growing market. The future performance of these businesses is uncertain. A question mark that can capture increasing amounts of this growing market may be very profitable. On the other hand, a question mark unable to keep up with market growth is likely to have low profits.

What is a company that follows a defender strategy like?

Rather than seeking new growth opportunities and innovation, a company that follows a defender strategy concentrates on protecting its current markets, maintaining stable growth, and serving current customers, generally by lowering its costs and improving the performance of its existing products.

How does SWOT analysis categorize organizational strengths?

SWOT analysis divides organizational strengths into two categories: common strengths and distinctive competencies.

What is SWOT used for?

SWOT analysis is a careful evaluation of an organization's internal strengths and weaknesses as well as its environmental opportunities and threats.

What is SWOT?

SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats.

How do firms become diversified?

Some firms diversify by developing their own new products and services within the boundaries of their traditional business operations. Firms can also become diversified by replacing their former suppliers and customers. Another common way for businesses to diversify is through mergers and acquisitions

What is deliberate strategy?

Sometimes the processes of formulating and implementing strategies are rational, systematic, and planned. This is often referred to as a deliberate strategy—a plan chosen and implemented to support specific goals.

What is strategic imitation?

Strategic imitation is the practice of duplicating another firm's distinctive competence and thereby implementing a valuable strategy.

What is strategic management?

Strategic management, in turn, is a way of approaching business opportunities and challenges—it is a comprehensive and ongoing management process aimed at formulating and implementing effective strategies.

What is strategy formulation?

Strategy formulation is the set of processes involved in creating or determining the strategies of the organization

What is synergy?

Synergy exists among a set of businesses when the businesses' economic value together is greater than their economic value separately.

What is a BCG?

The BCG (for Boston Consulting Group) matrix provides a framework for evaluating the relative performance of businesses in which a diversified organization operates. It also prescribes the preferred distribution of cash and other resources among these businesses.

How does accounting and finance help Porter's generic strategy of differentiation?

The function of accounting and finance in a business that is implementing a differentiation strategy is to control the flow of funds without discouraging the creativity needed to constantly develop new products and services to meet customer needs.

What does the BCG matrix suggest?

The matrix suggests that fast-growing markets in which an organization has the highest market share are more attractive business opportunities than slow-growing markets in which an organization has a small market share.

What is the most important strategic issue at the corporate level?

The most important strategic issue at the corporate level concerns the extent and nature of organizational diversification.

What is the objective of most mergers and acquisitions?

The objective of most mergers and acquisitions is the creation or exploitation of synergies

What is the distinction between strategy formulation and strategy implementation?

The primary distinction is along the lines of content versus process: The formulation stage determines what the strategy is, and the implementation stage focuses on how the strategy is achieved.

What is the product life cycle?

The product life cycle is a model that shows how sales volume changes over the life of products.

What is the scope of a strategy?

The scope of a strategy specifies the range of markets in which an organization will compete.

What are the two levels of business strategy?

The two general levels are business-level strategies and corporate-level strategies.

What are the two major tools for managing diversification?

The two major tools for managing diversification are (1) organization structure (2) portfolio management techniques.

What are the three types of diversification strategies?

There are three types of diversification strategies: single-product strategy, related diversification, and unrelated diversification.

Does a focus strategy have either a differentiation focus, or an overall cost leadership focus?

This strategy may have either a differentiation focus, whereby the firm differentiates its products in the focus market, or an overall cost leadership focus, whereby the firm manufactures and sells its products at low cost in the focus market.

What are the three important classification schemes for formulating business-level strategies?

Three important classification schemes are 1. Porter's generic strategies 2. the Miles and Snow typology 3. and strategies based on the product life cycle.

True or false: Distinctive competencies are rare among a set of competitors.

True

What are the two important portfolio management techniques?

Two important portfolio management techniques are the BCG matrix and the GE Business Screen.

What does understanding the four stages in product life cycle help managers recognize?

Understanding the four stages in the product life cycle helps managers recognize that strategies need to evolve over time.

Do virtually all larger businesses in the U.S practice related diversification?

Virtually all larger businesses in the United States practice related diversification.

What is a business like that follows a reactor strategy?

a business that follows a reactor strategy has no consistent strategic approach; it drifts with environmental events, reacting to but failing to anticipate or influence those events.

What is an emergent strategy?

a pattern of action that develops over time in an organization in the absence of mission and goals or despite mission and goals

What are the 3 areas that well-conceived strategy addresses?

distinctive competence, scope, and resource deployment

What does evaluating an organization's opportunities require?

evaluating opportunities and threats requires analyzing an organization's environment

What does manufacturing do regarding the implementation of business-level strategies?

manufacturing creates the organization's products or services.

What happens when keeping track of and controlling the flow of money become more important than determining how money and resources are best spent to meet customer needs?

no organization, whether high-tech firm or fashion designer, will be able to implement a differentiation strategy effectively

What is strategy implementation?

strategy implementation is the methods by which strategies are operationalized or executed within the organization.

What two factors does the BCG matrix use to evaluate an organization's set of businesses?

the growth rate of a particular market and the organization's share of that market.

What are the two ways that organizations address weaknesses?

1. First, it may need to make investments to obtain the strengths required to implement strategies that support its mission. 2. Second, it may need to modify its mission so that it can be achieved with the skills and capabilities that the organization already has.

What are the 4 stages during product life cycle?

1. Introduction 2. Growth 3. Maturity 4. Decline

What are the four categories of the Miles and Snow typology?

1. prospector 2. defender 3. analyzer 4. reactor.

What are the three reasons that a distinctive competence might not be imitated?

1. the acquisition or development of the distinctive competence may depend on unique historical circumstances that other organizations cannot replicate. 2. Second, a distinctive competence might be difficult to imitate because its nature and character might not be known or understood by competing firms. 3. Finally, a distinctive competence can be difficult to imitate if it is based on complex social phenomena, like organizational teamwork or culture.

What is a business that uses an analyzer strategy like?

A business that uses an analyzer strategy, in which it tries to maintain its current businesses and to be somewhat innovative in new businesses, combines elements of prospectors and defenders.

What is a common strength?

A common strength is an organizational capability possessed by a large number of competing firms.

What is backward vertical integration?

A company that stops buying supplies (either manufactured goods or raw materials) from other companies and begins to provide its own supplies has diversified through backward vertical integration.

What is a distinctive competence?

A distinctive competence is a strength possessed by only a small number of competing firms.

What is distinctive competence?

A distinctive competence is something the organization does exceptionally well. (We discuss distinctive competencies more fully later.) A distinctive competence of Abercrombie & Fitch is its ability to manage its supply chain more effectively than most of its competitors

What is a focus strategy?

A firm pursuing a focus strategy concentrates on a specific regional market, product line, or group of buyers.

What is a firm like when it follows a prospector strategy?

A firm that follows a prospector strategy is a highly innovative firm that is constantly seeking out new markets and new opportunities and is oriented toward growth and risk taking.

What is the miles and snow typology?

A second classification of strategic options was developed by Raymond Miles and Charles Snow. These authors suggested that business-level strategies generally fall into one of four categories: prospector, defender, analyzer, and reactor.

What is a strategy?

A strategy is a comprehensive plan for accomplishing an organization's goals.

What is resource deployment?

A strategy should also include an outline of the organization's projected resource deployment—how it will distribute its resources across the areas in which it competes.

What is a sustained competitive advantage?

A sustained competitive advantage is a competitive advantage that exists after all attempts at strategic imitation have ceased.

What does the maturity stages of the product life cycle look like?

During this maturity stage, overall demand growth for a product begins to slow down, and the number of new firms producing the product begins to decline. The number of established firms producing the product may also begin to decline. This period of maturity is essential if an organization is going to survive in the long run. Product differentiation concerns are still important during this stage, but keeping costs low and beginning the search for new products or services are also important strategic considerations.

What is an SBU?

Each business or set of businesses within such an organization is often referred to as a strategic business unit, or SBU.

True or false: Thus a film company that exploits only its common strengths in choosing and implementing strategies is likely to go beyond average performance.

False: Competitive parity exists when large numbers of competing firms are able to implement the same strategy. In this situation, organizations generally attain only average levels of performance. Thus a film company that exploits only its common strengths in choosing and implementing strategies is not likely to go beyond average performance.

What are effective strategies?

Finally, effective strategies are those that promote a superior alignment between the organization and its environment and the achievement of strategic goals.

What is unrelated diversification?

Firms that implement a strategy of unrelated diversification operate multiple businesses that are not logically associated with one another.

What can a firm that successfully implement a differentiation strategy do?

Firms that successfully implement a differentiation strategy can charge more than competitors because customers are willing to pay more to obtain the extra value they perceive.

What are the two advantages of unrelated diversification?

First, a business that uses this strategy should have stable performance over time. During any given period, if some businesses owned by the organization are in a cycle of decline, others may be in a cycle of growth. Unrelated diversification is also thought to have resource allocation advantages. Every year, when a corporation allocates capital, people, and other resources among its various businesses, it must evaluate information about the future of those businesses so that it can place its resources where they have the highest potential for return. Given that it owns the businesses in question and thus has full access to information about the future of those businesses, a firm implementing unrelated diversification should be able to allocate capital to maximize corporate performance.

What are the 3 primary advantages of pursuing a strategy of related diversification?

First, it reduces an organization's dependence on any one of its business activities and thus reduces economic risk. Second, by managing several businesses at the same time, an organization can reduce the overhead costs associated with managing any one business. In other words, if the normal administrative costs required to operate any business, such as legal services and accounting, can be spread over a large number of businesses, then the overhead costs per business will be lower than they would be if each business had to absorb all costs itself. Third, related diversification allows an organization to exploit its strengths and capabilities in more than one business. When organizations do this successfully, they capitalize on synergies, which are complementary effects that exist among their businesses.

What is related diversification?

If the businesses are somehow linked, that organization is implementing a strategy of related diversification.

What is involved in implementing emergent strategies?

Implementing emergent strategies involves allocating resources even though an organization has not explicitly chosen its strategies.

In SWOT analysis, what are the best strategies that accomplish an organization's mission?

In SWOT analysis, the best strategies accomplish an organization's mission by (1) exploiting an organization's opportunities and strengths while (2) neutralizing its threats and (3) avoiding (or correcting) its weaknesses.

How does marketing and sales help Porter's generic strategy of differentiation?

In general, to support differentiation, marketing and sales must emphasize the high-quality, high-value image of the organization's products or services

When does an industry have relatively few opportunities and many threats?

In general, when the level of competitive rivalry, the power of suppliers and buyers, and the threat of substitutes and new entrants are all high, an industry has relatively few opportunities and many threats. Firms in these types of industries typically can achieve only normal economic performance

What are the two concerns that organizations must face when implementing a diversification strategy?

In implementing a diversification strategy, organizations face two important questions. First, how will the organization move from a single-product strategy to some form of diversification? Second, once the organization diversifies, how will it manage diversification effectively?

What are organizational weaknesses?

Organizational weaknesses are skills and capabilities that do not enable (and may limit) an organization to choose and implement strategies that support its mission.

What is the main reasons that organizations have a hard time focusing on weaknesses?

In practice, organizations have a hard time focusing on weaknesses, in part because 1. organization members are often reluctant to admit that they do not have all the skills and capabilities needed. 2. Evaluating weaknesses also calls into question the judgment of managers who chose the organization's mission in the first place and who failed to invest in the skills and capabilities needed to accomplish it.

What is the decline stage like in the product life cycle?

In the decline stage, demand for the product or technology decreases, the number of organizations producing the product drops, and total sales drop. Demand often declines because all those who were interested in purchasing a particular product have already done so. Organizations that fail to anticipate the decline stage in earlier stages of the life cycle may go out of business. Those that differentiate their product, keep their costs low, or develop new products or services may do well during this stage.

What is the introduction stage of the product life cycle look like?

In this introduction stage, demand may be very high, sometimes outpacing the firm's ability to supply the product. At this stage, managers need to focus their efforts on "getting product out the door" without sacrificing quality. Managing growth by hiring new employees and managing inventories and cash flow are also concerns during this stage.

What do marketing and sales do in implementing business-level strategies?

Marketing and sales, for example, are used to promote products or services and the overall public image of the organization (often through various types of advertising), price products or services, directly contact customers, and make sales.

What is the major weakness of the single-product strategy?

Of course, if the product is not accepted by the market or is replaced by a new one, the firm will suffer.

Do organizations that take a prospector strategy usually switch to a defender strategy?

Often a firm implementing a prospector strategy will switch to a defender strategy. This happens when the firm successfully creates a new market or business and then tries to protect its market from competition.

What are organizational opportunities?

Organizational opportunities are areas that may generate higher performance.

What are organizational strengths?

Organizational strengths are skills and capabilities that enable an organization to conceive of and implement its strategies.

What are organizational threats?

Organizational threats are areas that increase the difficulty of an organization's performing at a high level.