MGMT 498 exam 1

black swan effects

(happened in the first decade of the 21st century) Incidents that describe highly improbable, but high impact events ex: 9/11 very unlikely, but had a huge impact

computing ROIC

(net profits / invested capital)

upper-echelons theory

- A conceptual framework that views organizational outcomes—strategic choices and performance levels—as reflections of the values of the members of the top management team.

strategic groups

-A set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage -they differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service

limitations of accounting data

-All accounting data are historical & thus backward-looking -Past decisions don't guarantee future performance -Accounting data do not consider off-balance sheet items -Accounting data focus mainly on tangible assets, which are not longer the most important -Not everything that can be counted counts. Not everything that counts can be counted

the economic value creation shows that strategy is about

-Creating economic value -Capturing as much of it as possible

strong ethical values have two important functions

-First, they form a solid foundation on which a firm can build its vision and mission, and thus lay the groundwork for long-term success. -Second, values serve as the guardrails put in place to keep the company on track when pursuing its vision and mission in its quest for competitive advantage

Some of the profitability ratios most commonly used in strategic management are

-Return on invested capital (ROIC) -Return on equity (ROE) -Return on assets (ROA) -Return on revenue (ROR)

limitations of SWOT

-cannot show you how to gain advantage- -strengths may not leaf to advantage -narrow focus on external environment -static assessment of moving target -strengths can also be a weakness (example about California on page 131)

oligopoly

-consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power -the degree of pricing power depends on the degree of product differentiation -the key feature is that the competing firms are interdependent -few competitors, the actions of one firm influence the behaviors of the others

value chain analysis

-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 -allows managers to obtain a more detailed and fine-grained 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

monopolistic competition

-has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers

what are examples of perfect competition

-natural gas, copper and iron tend to approach this structure

monopoly

-only one, often large firm supplying the market -offer unique product, and challenges to moving into the industry tend to be high -pricing power -the one firm is the industry

what are the five forces

-threat of entry -power of suppliers -power of buyers -threat of substitutes -rivalry among existing competitors

what is the value of the strategic group concept

-to explain the differences in firm performance within the same industry, it clusters different firms into groups based on a few key strategic dimensions -even within the same industry, firm performances differ depending on strategic group membership -competitive rivalry is strongest between firms that are within the same strategic group -the external environment affects strategic groups differently -the five competitive forces affect strategic groups differently -some strategic groups are more profitable than others

what is the purpose of the five-forces model of competition

-to help managers understand the profit potential of different industries and how they can position their respective firms to fain and sustain competitive advantage -avoid competitive industries and positions -identify areas of profitability in an industry

firms manager must be able to accomplish these critical tasks

1. Accurately assess the performance of their firm 2. Compare and benchmark their firm's performance to other companies in the same industry or against the industry average

when strategizing from competitive advantage managers rely on three approaches:

1. Strategic planning 2. Scenario planning 3. Strategy as planned emergence

ROIC two components

1. shareholders equity 2. interest-bearing debt

what are the steps to the shareholder impact analysis

1. who are our stakeholders? 2. what are our stakeholders interests and claims 3. what opportunities and threats do our stakeholders present? 4. what economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders? 5. what should we do to effectively address the stakeholder concerns?

stakeholder impact analysis

A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen. In each step, managers must pay particular attention to 3 important stakeholder attributes: power, legitimacy, and urgency:

AFI strategy framework

A model that links three interdependent strategic management tasks- analyze, formulate, and implement- that, together, help managers plan and implement a strategy that can improve performance and result in competitive advantage.

perfect competition

A perfectly competitive industry is fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices. firms competing in this industry are similar in size and resources -consumers make decisions solely on price because the commodity product offerings are more or less identical

illusion of control

A tendency by people to overestimate their ability to control events.

strategic commitments

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

strategic initiative

Any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures.

serendipity

Any random events, pleasant surprises,and accidental happenstances that can have a profound impact on a firm's strategic initiatives.

emergent strategy

Any unplanned strategic initiative bubbling up from the bottom of the organization.

realized strategy

Combination of intended and emergent strategy. is generally formulated through a combination of its top-down strategic intentions and bottom-up emergent strategy.

mission

How do we accomplish our goals? what an organization does. it defines the means by which vision is accomplished.

when does ROIC generate value

If a firm's ROIC > cost of capital

backwards integration

Occurs when a buyer moves upstream in the industry value chain, into the seller's business. ex: private label brands

sustainable competitive advantage

Outperforming competitors or the industry average over a prolonged period of time.

competitive parity

Performance of two or more firms at the same level

most commonly used metrics in assessing firm financial performance

ROIC

what does the competitive industry structure refer to

Refers to the elements and features common to all industries

autonomous actions

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

planned emergence

Strategy process in which organizational structure and systems allow bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management.

scenario planning

Strategy-planning activity in which top management envisions different what-if scenarios to anticipate plausible futures in order to derive strategic responses.

competitive advantage

Superior performance relative to other competitors in the same industry or the industry average

intended strategy

The outcome of a rational and structured top-down strategic plan.

strategy formulation

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

strategy implemtation

The part of the strategic management process that concerns the organization, coordination, and integration of how work gets done, or strategy execution

level 5 leadership pyramid

The pyramid is a conceptual framework that shows leadership progression through five distinct, sequential levels (Jim Collins). effective strategic leaders go through a natural progression of five levels. Each level builds upon the previous one; the manager can move on to the next level of leadership only when the current level has been mastered

dominant strategic plan

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

resource allocation process (RAP)

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

competitive disadvantage

Under performance relative to other competitors in the same industry or industry average

VRIO framwork

V: Valuable R: Rare I: costly to Imitate O: Organized to capture the value of the resource

values

What commitments do we make, and what guardrails do we put in place, to act both legally and ethically as we pursue our vision and mission?

vision

What do we want to accomplish ultimately? captures an organization's aspiration and spells out what it ultimately wants to accomplish.

how do you gain competitive advantage

a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods and services similar to the competitors' at a lower price.

market capitalization

a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time

cost of capital

a firm's cost of financing operations from both equity through issuing stock & debt through issuing bonds

top-down strategic planning

a rational, data-driven strategy process through which top management attempts to program future success.

strategy

a set of goal-related actions a firm takes to gain and sustain superior performance relative to competitors. to achieve superior performance companies compete for resources

customer oriented vision statements

allows companies to adapt to changing environments

SWOT

allows the strategist to evaluate a firm's current situation and future prospects by simultaneously considering internal (strengths and weaknesses) and external factors (opportunities and threats).

stakeholder strategy

an integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage

stakeholder strategy allows firms to

analyze and manage how various external and internal stakeholders interact to jointly create and trade value

producer surplus

another term for profit, the difference b/w price charged (P) and the cost to produce (C) or (P - C)

resources

any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy

organizational core values

are the ethical standards and norms that govern the behavior of individuals within a firm or organization

sociocultural

capture the society's cultures, norms and values -Population demographics, income distribution, social mobility, lifestyle changes, attitudes to work and leisure, consumerism, levels of education

resource heterogeneity

comes from the insight that bundles of resources, capabilities and competencies differ across firms -This insight ensures that analysts look more critically at the resource bundles of firms competing in the same industry because each bundle is unique to some extent

how do we assess competitive advantage

compare a firm performance to a benchmark- that is, either the performance of other firms in the same industry or an industry average.

rivalry among existing competitors

competitive rivalry is high when price competition is intense within the industry

corporate strategy

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

business strategy

concerns the question of how to compete. Three generic business strategies are available: cost leadership, differentiation, or value innovation.

functional strategy

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

industry effects

describe the underlying economic structure of the industry. They attribute firm performance to the industry in which the firm competes. -Elements such as entry and exit barriers, number and size of companies, and types of products and services offered

resource immobility

describes the insight that resources tend to be sticky and don't move easily from firm to firm -Because of the stickiness, the resource differences that exist between firms are difficult to replicate and therefore, can last a long time.

strategies 3 elements

diagnosis of competitive advantage, strategy formulation, implementation

profit

difference b/w price charged (P) and the cost to product (C), or (P - C); aka producer surplus

consumer surplus

difference b/w the value a consumer attaches to a good/service (V) an that he paid for it (P) or (V - P)

economic value creation

difference b/w value (V) and cost (C) or (V - C)

activities

distinct and fine-grained business processes such as order taking, the physical delivery of products, or invoicing customers

technological

factors capture the application of knowledge to create new processes and products -Govt. research spending, govt. and industry focus on technological effort, new discoveries/developments, speed of technology transfer, rates of obsolescence

economic

factors in a firms external environment are largely macroeconomic, affecting economy-wide phenomena -Business cycles, GNP trends, interest rates, money supply, inflation, unemployment, disposable income

legal

factors include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions -Competition law, employment law, health and safety, product safety

firm effects

firm performance attributed to the actions managers take

intangible resources

firm's culture, its knowledge, brand equity, reputation, and intellectual property

example of monopolistic competition

hardware industry

external stakeholders

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

internal stakeholder

include stockholders, employees (including executives, managers, and workers) and board members.

firm performance is determined by

industry and firm effects

environmental

involve broad environmental issues such as natural environment, global warming, and sustainable economic growth -Environmental protection laws, waste disposal, energy consumption

why is ROIC popular

it is a good proxy for firm profitability. It measures how effectively a company uses its total invested capital

tangible resources

labor, capital, land, buildings, plant, equipment, and supplies

strategic management process

lays the foundation for sustainable competitive advantage.

5 levels of leadership pyramid

level 1: highly capable individual 2: contributing team member 3: competent manager 4:effective leader 5: executive

formulation stage of scenario planning

management teams develop different strategic plans to address possible future scenarios. This kind of what-if exercise forces managers to develop detailed contingency plans before events occur.

analysis stage of scenario planning

managers brainstorm to identify possible future scenarios. Input from several different hierarchies within the organization and from different functional areas such as R&D, manufacturing, and marketing and sales is critical.

implementation stage of scenario planning

managers execute the dominant strategic plan, the option that top managers decide most closely matches the current reality.

what is the goal of PESTEL

not to produce an exhaustive list, but to identify the relevant factors that will influence firm performance going forward and develop strategies to avoid or capitalize on them.

computing market capitalization

number of outstanding shares X share price

stakeholders

organizations, groups, and individuals that can affect or are affected by a firm's actions.

strategic leadership

pertains to executives' use of power and influence to direct the activities of others when pursuing an organization's goals

PESTEL

political, economic, sociocultural, technological, environmental/ecological, legal

3 important stakeholder attributes

power legitimacy and urgency

power of buyers

power of buyers in high when buyers have high bargaining power and/or when they are price sensitive

power of suppliers

power of suppliers is high when suppliers have high bargaining power and/or when they are price sensitive

political

result from the processes and actions of government bodies that can influence the decisions and behavior of firms. ex: Government stability, taxation policy, foreign trade regulations, social welfare policies

total return to shareholders

return on risk capital that includes stock price appreciation plus dividends received over a specific period

core value statement

statement of principles to guide an organization as it works to achieve its vision and fulfill its mission, for both internal conduct and external interactions; it often includes explicit ethical considerations -It offers bedrock principles that employees at all levels can use to deal with complexity and to resolve conflict. Such statements can help provide the organization's employees with a moral compass.

value

the dollar amount (V) a consumer attaches to a good/service; the consumer's max willingness to pay; also called reservation price

strategic management

the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Mastery of strategic management enables you to view a firm in its entirety

reservation price

the maximum price a consume is willing to pay for a product or service based on the total perceived consumer benefits

risk capital

the money provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt

effective management of stakeholders

the organization, groups, or individuals that can materially affect or are affected by the action of a firm- is necessary to ensure the continued survival of the firm and to sustain any competitive advantage

capabilities

the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically

strategic business units or SBU's

the standalone divisions of a larger conglomerate, each with its own profit-and-loss responsibility.

threat of substitutes

threat is high when consumers can easily choose alternative goods from other industries

threat of entry

threat is high when there are few barriers to entry

what does accounting data enable us to do

to conduct direct performance comparisons b/w different companies

core competencies

unique strengths that are embedded deep within a firm -Allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost

when does a stakeholder have power

when it can get the company to do something that it would otherwise not do.

when does a stakeholder have a legitimate claim

when it is perceived to be legally valid or otherwise appropriate

when does a stakeholder have an urgent claim

when it requires a company's immediate attention and response.

how is the competitive industry structure captured

• Number and size of its competitors • The firms' degree of pricing power • The type of product or service • The height of entry barriers