Strategic Management

There are four components to the strategy process.

1. Analyze the External Environment 2. Analyze the Internal Environment 3. Identify Strategic Alternatives 4. Select and Implement an Appropriate Strategy

Differences Between Competitive Strategy and Corporate Strategy

1. Competitive Strategy Deals with one firm Focuses on gaining and maintaining a sustainable competitive advantage Involves creating value for a firm through either differentiation or cost leadership strategies 2. Corporate Strategy Deals with many businesses within one firm Focuses on how a firm can be more profitable than the collection of individual businesses in the firm's portfolio (also called a parenting advantage) Involves methods that gain an advantage for a firm through the ways the individual businesses in the firm interact

Four Types of Corporate Strategies

1. Cross-selling Obtaining increased revenue across business units by selling products to each other's customers Example: A company that manufactures tennis equipment merges with a company that manufactures sports attire so the two divisions can sell to each other's customers. 2. Scope Economies Obtaining cost efficiencies by sharing activities across businesses Example: A publisher of general interest books merges with a publisher of educational materials. After the merger, the two divisions use one human resources department and one accounting department to save costs. 3. Unrelated Diversification Expansion into businesses with little or no common products, technologies, or processes Example: A giant corporation expanded from its original service of operating hotels by adding the production of movies, defense satellites, and convenience foods. 4. Related Diversification Building business portfolios around common products and technologies Example: A large corporation produces and sells office supplies, art supplies, and scrapbooking supplies.

Two Competitive positioning strategies

1. Differentiation Strategy This approach tries to convince customers to pay higher prices for products. By doing this, the company increases value capture. However, if the cost rises too much, then there will be no net advantage for the company. 2. Cost Leadership Strategy This approach tries to get costs down and thereby increase the amount of value capture from the bottom. The company attempts to reduce expenses without having the buyers refuse to pay because of a collapse in product quality.

Match each example with the type of threat it represents in the five forces framework

1. Firms have limited options for procuring raw materials. 1. High threat of suppliers 2. Customers feel little loyalty. 2. High threat of buyers 3. Firms are supplying more output than necessary to meet demand. 3. High threat of rivalry

Three Steps to Analyzing a Firm's Resources and Capabilities

1. Look into all of the firm's value chain activities to identify resources and capabilities that are valuable. These resources enable firms to develop new products and services that satisfy customer needs. 2. Perform a benchmarking analysis to determine which resources and capabilities are rare. If a resource or capability is rare, it should translate into profits in some way for the firm. 3. Determine whether it is difficult for another firm to imitate each resource or capability. If a resource is rare and costly to imitate, then the firm is able to generate a sustainable competitive advantage.

Common Barriers to Entry

1. Scale economies: Exist when unit costs fall with higher levels of output due to spreading fixed costs over greater amounts of output. New entrants can enter at a large scale and risk retaliation from competitors, or enter at a smaller scale and face a cost disadvantage. 2. Learning economies: Exist when unit costs fall with greater output over time as a result of getting more efficient and gaining more experience. New entrants face a disadvantage due to the time it takes to achieve efficiencies through trial and error. 3. Governmental laws and regulations: In certain industries, licensing requirements, regulations on market entry, and even the time required to fill out paperwork can serve as barriers to entry.

Threats in the Five Forces Network

1. Threat of rivalry grows when there are many firms in an industry. 2. Threat of entry exists when it is easy for new firms to enter an industry or market. 3. Threat of substitutes exists when substitutes for a product or service exist and it is easy or inexpensive for buyers to switch. 4. Threat of suppliers exists when suppliers have greater bargaining power relative to a firm. 5. Threat of buyers exists when buyers have significant bargaining power over firms.

Three Steps of Cost Leadership Strategy

1. Value chain analysis Managers begin by looking at all the activities a firm is involved in. The value chain presents a graphical depiction of the firm's main activities. 2. Cost driver analysis For each activity, managers determine which decisions or factors have an effect on cost. 3. Competitor benchmarking In the final step, managers quantify how they can achieve cost advantages over competitors in individual activities by performing them differently.

In regard to analyzing a firm's resources and capabilities, match the steps to take with examples of how to do each step

1. Which of our resources can we use to create new offerings and meet customers' needs? 1. Determine which of the firm's resources and capabilities are valuable. 2. What are we capable of doing that is unique to our firm? 2. Use benchmarking to identify the firm's rare resources and capabilities. 3. What are the things we do exceptionally well that competitors can't figure out? 3. Gauge the inimitability of the firm's resources and capabilities.

Three Resources and capabilties must be:

1.The root source of a firm's competitive advantage 2.Valuable and rare 3. Difficult for a rival to imitate

cost leadership strategy examples

A company implements a cost leadership strategy by reducing its technology costs and producing vacuum cleaners that have acceptable quality at a lower price than competitors' products. A large firm produces a cost leadership strategy by eliminating middle management positions that were not productive, thus reducing its payroll costs.The key is to not have a collapse in product or service quality while focusing on cost reductions.

Relationship Between Value Creation and Competitive Advantage

A firm will maintain a competitive advantage over rival firms if it generates more value creation for customers. There are two main ways for firms to create value: cost advantage and differentiation advantage. Examples of each are shown below.

Cost Advantage

A furniture company creates value for its customers by using cost advantage. The company charges lower prices than competitors do because it produces its products more cheaply. The quality of the furniture is lower than competitors' products, but many customers don't care because of the lower cost. In this way, the company maintains a competitive advantage over rival firms.

focus strategy examples

A jewelry company might focus on selling high-priced jewelry to people who are in a high-income bracket. A copy machine manufacturer could focus on selling its products to other businesses, rather than to end users at the retail level.

Lean Manufacturing

A set of methods to reduce defects, inventories, and other waste in the manufacturing process Examples: Manufacturing process innovations might reduce defect rates. Inventory reduction and the selection and management of suppliers can reduce the cost of goods sold.

Differentiation Advantage

A shoe company creates value for its customers by using differentiation advantage. The company charges higher prices for its shoes than competitors do because it produces higher-quality shoes. As a result, many customers are willing to pay a higher price for the better quality shoes. In this way, the company maintains a competitive advantage over rival firms.

Barriers to Imitation

Barriers to imitation are characteristics that make a firm's resources and capabilities difficult to imitate by other firms.

Causal ambiguity

Being highly successful for reasons competitors can't quite understand

______ have a large amount of power over firms when they are sensitive to prices.

Buyers

Tacit knowledge

Capitalizing on creative processes that can't be easily explained

Factors Affecting the Threat of Rivalry

Concentration/Fragmentation The threat of rivalry is lower in concentrated industries where one firm, or a few firms, have substantial market share. Rivalry between firms will grow when there are many firms in an industry, a situation known as industry fragmentation. Differentiation/Commoditization Rivalry is lower when competing firms offer product differentiation, or unique product attributes that customers value. Product commoditization, when multiple firms have similar offerings, eliminates differentiation and increases the threat of rivalry. Overcapacity Rivalry increases when firms supply more output than is needed to meet demand, a situation known as overcapacity. Overcapacity often occurs in industries with high exit costs, or expenses incurred to leave an industry or facility. Industry Growth When overall industry growth is high, an individual firm can expand by getting brand new customers in a market. When industry growth slows, firms tend to compete more aggressively by trying to win customers from rivals.

Business Model

Convey how the firm's main policies fit together and translate into higher profits through pricing, cost structures, and volume growth.

Value Creation

Definition Differences between a customer's buyer value (willingness to pay) and the firm's cost in offering a product or service Determining Factor How much a customer is willing to pay Example A product costs $10 to produce. The maximum amount a customer is willing to spend on the product is $50. The value created by the firm (customer's willingness to pay minus the cost to the firm) is $40.

Value Capture

Definition Profits a firm obtains by charging a price more than its costs for a product or service Determining Factor How much a customer actually pays Example A product costs $10 to produce. The maximum amount a customer is willing to spend on the product is $50, but the price is $40. The value captured by the firm (customer's price paid minus the cost to the firm) is $30.

Business Process Re-Engineering

Definition: A process to identify inefficiencies that might have developed over time. Examples: Companies look for ways to change the sequence of jobs and combine jobs. Companies might change the location of tasks, develop new processes for different situations, and decentralize certain decisions.

Oligopoly

Definition: An industry made up of a small number of firms with large market shares Examples: U.S. auto industry (the "big three" of Chrysler, Ford, and GMC) Soft drinks (Coke and Pepsi) Wireless communication carriers (AT&T, Sprint, T-Mobile, Verizon) number of firms operating in a concentrated industry

Monopoly

Definition: An industry with a single company operating within it Examples: De Beers had near total control over the diamond market during the 20th century. AT&T was once the sole provider of telephone service in the United States

Forward Vertical Integration

Definition: Occurs when a firm acquires a customer or other entity in an effort to control the distribution or supply of the company's products Example: A food producer might acquire one of its wholesalers or distributors to influence the retail locations in which its products are sold.

Backward Vertical Integration

Definition: Occurs when a firm acquires a supplier to improve efficiencies, reduce production costs, and exert bargaining power Example: An electronics firm might acquire one of its parts suppliers or manufacturers to increase efficiency and limit production costs.

Complements

Definition: Products or services that can be used to enhance or improve another product or service Firms want the price of their complements to be low because increased demand for complements will also increase the quantity demanded for the firm's product. Examples: iPhones and iOS apps Nike running shoes and athletic clothes Toyota cars and gasoline

Substitutes

Definition: Products or services that offer similar benefits as the ones already produced by firms within the industry Firms want the price of their substitutes to be high so that customers will demand the company's product rather than a competitor's substitute. Examples: iOS vs. Android phones Nike vs. Adidas shoes Toyota vs. Honda vs. Nissan cars

Implications of the Five Forces Network

Enables managers to analyze more rigorously the threats (in SWOT) facing their company Focuses on thinking ahead by reasoning backward: The profitability of the firm depends on the actions of competitors, which depend on the structure of the industry. Explains what determines value capture: The lower these threats, the larger is the value capture for the firm.

Cost advantage and differentiation advantage

Explains why individual firms in an industry are experiencing higher or lower profits.

Advantages from Resources and Capabilities

For a firm to have a sustainable competitive advantage, it needs to have a set of resources and capabilities that enable it to offer attractive products and services in a cost-effective manner. If resources and capabilities are to accomplish this, they need to have certain characteristics.

Which of these conditions can make the threat of rivalry h

Having a large number of firms in an industry Multiple firms in an industry offering similar products or service

Time compression diseconomies

Having long-standing relationships with suppliers

Industry analysis

Helps pinpoint how an organization can create value and maximize profits in specific markets. Firms that can create value better than their competitors are well-positioned to capture value and thus earn superior profits.

Which step in the analysis of a firm's resources and capabilities determines the sustainability of a competitive advantage?

Identify resources that are rare and difficult to imitate.

Elements that Affect Supplier Threat

If there are many potential suppliers, the firm, not the supplier, has greater bargaining power. If there are limited suppliers, then the suppliers have more power and can negotiate favorable terms for themselves. A firm can reduce supplier threat by engaging in backward vertical integration or increasing its size.

Substitutes vs. Complements

In narrow industries with a limited number of offerings

SWOT Analysis

Is a tool that any organization can use to address a broad set of issues. It consists of an evaluation of a firm's internal strengths and weaknesses and a diagnosis of its external opportunities and threats. SWOT analysis provides a groundwork for the strategy process, helping managers identify and evaluate strategic alternatives and select which strategy to implement.

Organization's strategy

Is an integrated pattern of decisions it makes to achieve its objectives through resource allocations and actions in markets. Strategy is about about doing the right things to enhance the effectiveness of the organization.

Strategy formulation

Is the act of developing strategies in an organization. Strategy formulation requires managers to analyze the organization's internal and external environments to determine how to best meet its objectives using the resources and opportunities it has.The formulation of a good strategy must take into account how employees in the organization will implement it; otherwise, it is just an idea or concept that may not work out.Reason: Correct. The execution of strategies in an organization characterizes strategy implementation.

Strategic management,

Is the process by which firms formulate, execute, and evaluate their decisions. Strategic managers must ensure the organization maximizes its internal resources and capabilities while accounting for potential obstacles in the external environment. The strategy process consists of two parts:

Strategic management

Is ultimately about how managers can enhance their firm's profits, it also has to address how managers can learn to identify factors that make a given industry profitable or unprofitable.

Benefits of SWOT

It helps determine what barriers exist to meeting company objectives. It helps brainstorm alternative courses of action. It helps describe competitive and other threats to the organization. It helps communicate the results of environmental analysis. It helps identify the need for organizational change and the path for those changes.

Two methods firms can use to formulate and implement cost leadership strategies

Lean Manufacturing Definition: A set of methods to reduce defects, inventories, and other waste in the manufacturing process Business Process Re-Engineering Definition: A process to identify inefficiencies that might have developed over time.

Analyze the External Environment

Managers appraise the opportunities available to the organization and the threats that the organization faces

Select and Implement an Appropriate Strategy

Managers choose and implement the strategy they believe gives the organization its best chance at success.

Limitations

Managers create "laundry lists" of characteristics not differentiated by their relative importance to the firm's operations. Managers' analysis is subjective and does not provide adequate quantitative analysis of benefits, costs, or risks. SWOT is not analytically rigorous.

Identify Strategic Alternatives

Managers hone in on various courses of action available to the firm given its strengths, weaknesses, opportunities, and threats (SWOT analysis).

Analyze the Internal Environment

Managers identify the firm's strengths and weaknesses.

Preemption

Obtaining a prime corner of real estate for a storefront

What are some ways a firm can build a cost leadership strategy?

Offering scheduled, rather than on-demand, deliveries Decreasing staff size Reducing IT expenditures

Which statement best describes how SWOT analysis fits into the strategy process?

SWOT analysis lays the groundwork for the firm to identify and select among strategic alternatives.

Which statement best describes the first step of the strategy process?

Searching for new possibilities as well as trends/changes that may affect the firm

The strategy process consists of two parts:

Strategy formulation: Developing business strategies and figuring out how employees will carry them out Strategy implementation: Carrying out those strategies and obtaining new information that can. Reason: Correct. The execution of strategies in an organization characterizes strategy implementation.

Examples of SWOT Elements

Strengths: Intellectual property, positive company culture, relationships with key stakeholders Weaknesses: Lack of patents, managerial turnover, weak brand recognition Opportunities: New customer needs, new technologies, new markets for services Threats: Competitors offering lower prices, changing customer preferences, new regulations

Differentiation Advantage

The ability of a firm to charge a price premium due to unique offerings

Cost Advantage

The ability of a firm to have lower expenses than competitors

A cost leadership strategy

The key is to not have a collapse in product or service quality while focusing on cost reductions.

Role of Integration in Strategic Decision Making

To be successful, strategic decisions require integration or consistency with the firm's existing policies and overall mission.

lean manufacturing and business process re-engineering

Two methods firms can use to formulate and implement cost leadership strategies

Five Types of Differentiation Strategies

Use advertising to promote the integrity of a company or what is distinctive about a product or service. Use generous warranties and money-back guarantees. Have top-notch engineers and other employees who are especially skilled. Use high-quality materials for products. Use environmental practices to highlight the integrity of a company.

Strategic decisions require integration, because they must

align with other decisions and support the mission of the firm

Firms need to determine which resources and capabilities are valuable because these ______

allow the firm to remain competitive and keep customers happy

A lack of integration between strategic decisions

can lead to rising costs and a decreased ability to meet customers' needs.

Lack of clarity on the root causes of success is the definition of ______.

causal ambiguity

Two firms in the same industry can experience different profit levels, even though they are subject to the same five forces. This type of competitive advantage happens primarily because one firm ______.

creates more value than the other

The threat of buyers will be reduced when buyers ______.

feel very loyal have high switching costs

threat of entry

from other firms that have not yet entered the industry, particularly when it is easy for new firms to enter the industry or market. Barriers to entry help protect firms from the threat of entry.

competitive positioning

general industry profits are affected by the five forces, firm-level profitability. Firms can position themselves strategically by using either a differentiation strategy or a cost leadership strategy.

Firms need to determine which resources and capabilities are rare because these ______.

increase profits by improving the firm's costs, volume, or prices

A situation in which there are many companies competing in an industry with no dominant competitors is known as ______

industry fragmentation

differentiation strategy

is a method used by firms to get buyers to pay a price premium for their product. Doing this will increase the value a firm might capture.

focus strategy

is an emphasis on particular customers, products, or geographic locations.

Threat of Rivalry or intense competition

is one important threat to value capture within an industry.

Corporate Strategy

is the scope or direction of a firm and how various units of a company work together to create value

Property rights represent a barrier to imitation because they ______.

minimize the availability of competing products

Threat of Suppliers

refers to the bargaining power suppliers have with firms. The greater the bargaining power of suppliers, the greater the threat they pose because this bargaining power will tend to raise a firm's costs.

in unit costs with higher levels of output due to spreading fixed costs over greater amounts of output is the definition of ______ economies.

scale

cost leadership strategy

seeks to offer a product or service that is generally acceptable at a much lower cost. By doing this, a firm is able to capture value.

The goal of industry analysis is to ascertain why

some industries are more attractive than others

Knowledge that cannot be codified or written down in manuals or other documentation is called ______

tacit knowledge