STRATEGIC MANAGEMENT Ch 3-5

Exit barriers are comprised of which two factors?

1. Economic factors which include fixed costs that must be paid and/or contractual obligations to suppliers. 2. Social factors which include elements such as emotional attachment to geographic locations.

What is dynamic capabilities?

A firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage. They enable firms to create market changes and are relevant for surviving and competing in markets that shift quickly.

What is the Dynamic capabilities perspective?

A model that emphasizes a firm's ability to modify and leverage its resource base in a way that enables to gain and sustain competitive advantage in a constantly changing environment.

What is the resource-based view of the firm?

A model that sees certain types of resources as key to superior firm performance. RBV is the value of resources depends on several factors. Resources (financial, physical, interpersonal) to create resource value it needs to be either rare or difficult to imitate.

What is industry convergence?

A process in which unrelated industries begin to satisfy the same customer needs. Example: newspapers, magazines, TV, movies, radio moving to providing information online.

What is meant by rare resource?

A resource is rare if only one or few firms possess it. Rare resources is one of the four key criteria in the VRIO framework.

What is social complexity?

A situation in which different social and business systems interact with one another.

What is meant by sustainable strategy?

A strategy that can be pursued over time without detrimental effects on people or the planet.

What are the three limitations of accounting data?

Accounting data are historical and backward-looking. It does not consider off-balance sheet items. It focuses mainly on tangible assets which are no longer the most important.

What are three traditional frameworks to measure and assess firm performance?

Accounting profitability, shareholder value creation, and economic value creation.

What is meant by better expectations of future resources value?

Acquiring resources at a low cost can lay the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate than those held by competitors.

What is an activity?

Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services.

What is meant by the primary activities of the value chain? What are the types of primary activities?

Activities that add value directly by transforming inputs into outputs as the firm moves product or service horizontally along the internal value chain. Types include supply chain management, operations, distribution, marketing and sales, and after-sales service.

What advantages to incumbent firms possess independent of size? (Brand loyalty, preferential access, favorable locations, cumulative learning and experience).

Advantages independent of size are advantages based on brand loyalty, preferential access to raw materials (ex: lithium-ion batteries for smart cars), favorable locations, and cumulative learning experiences.

What are the advantages and disadvantages of the balanced scorecard?

Advantages: can accommodate both short- and long-term performance metrics which allows leaders to assess past performances. Disadvantages: It is not a tool for strategy formulation, only a tool for implementation. It is only as good as the skills of the managers who use it.

Relative to Apple, does Amazon capture much of the economic value it creates? Why is this the case?

Amazon captures a large amount of value for its customers but it is not capturing much of it at this point. They are creating value for its customers and 3rd party sellers but Amazon is comfortable in taking minor or no profit in doing so. They care more about installed base of its users and want to lock out competing retail platforms.

Relating to accounting profitability, what two critical tasks must a firm's managers be able to accomplish to determine if the firm has achieved superior performance relative to competitors?

Assess the performance of their firm accurately and compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. (Standardized financial metrics found in publicly available income statements and balance sheets allow a firm to fulfill both these tasks.)

What are isolating mechanisms? What different types of isolating mechanisms exist?

Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy.

Which report submitted annually to the SEC by publicly traded firms is the primary source of a firms' accounting data available to the public?

Form 10-K, which are the primary source of companies' accounting data.

Is competitive advantage more likely to spring from tangible or intangible resources? Why?

Competitive advantage is more likely to spring from intangible resources. Tangible resources can be bought by anyone who has the cash whereas a brand must be built.

What is a capability? Are they by nature tangible or intangible? Where do they find their expression?

Capabilities are organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically and are intangible. Their expressions are found in a company's structure, routines, and culture.

What is causal ambiguity?

Causal ambiguity is a situation in which the cause and effect of a phenomenon are not readily apparent.

How can the economic value creation model identify the firm with the competitive advantage?

Competitive advantage goes to the firm that achieves the largest economic value created which is the difference between V, the consumer's willingness to pay and C, the cost the produce the good or service. It can charge higher prices to reflect the higher value to increase profitability or it can charge the same price as competitors and gain the market share.

What is competitive industry structure? Which four elements and features make up the industry structure?

Competitive industry structure refers to elements and features common to all industries: the number and size of competitors, the firm's degree of pricing power, the type of product/service, and the height of entry barriers.

The intensity of rivalry among existing competitors is determined largely by which four factors?

Competitive industry structure, industry growth, strategic commitments, and exit barriers.

What four insights does Exhibit 3.8 provide?

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, and some strategic groups are more profitable than others.

What is a complement? What impact do complements have on demand for a primary product?

Complement is a product or service that adds value to the original product which increases the demand for the original thereby enhances profit potential.

What is a complementor? Co-opetition? How do Google and Samsung engage in co-petition?

Complementor is a company that provides good or service that leads customers to value your firm's offering more when the two are combined. Co-opetition is cooperation by competitors to achieve a strategic objective. Example: Samsung and Google cooperate as complementors to compete against Apple's industry while becoming more competitive with each other as well.

What are core competencies? What do they allow a firm to do? Do they tend to be visible or invisible?

Core competencies are invisible unique strengths embedded within a firm that are critical to gaining and sustaining competitive advantage.

What is core rigidity?

Core rigidity is a core competency that turned into a liability because the firm failed to hone, refine, and upgrade the competency as the environment changed.

What is a Costly-to-Imitate resource? What is direct imitation? Why was Crocs Shoes unable to sustain its competitive advantage? What is substitution and strategic equivalence?

Costly-to-imitate is one of the four key criteria in the VRIO framework. It is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost. It is an internal strength and core competency.

The economic value creation framework shows strategy is about what two ideas?

Creating economic value and capturing as much of it as possible.

What are three limitations of the economic value creation model?

Determine the value of a good in the eyes of consumers is not a simple task. The value of a good in the eyes consumer changes based on income, preferences, time, and other factors. To measure firm-level competitive advantage, we must estimate the economic value created for all products and services offered by the firm.

What is profit?

Difference between price charged (P) and the cost to produce (C), or (P-C).

What is consumer surplus?

Difference between the value a consumer attaches to a good or service (V) and what he or she paid for it (P). (V-P).

Understand Exhibit 4.4 relating to core competencies and related discussion.

Each distinct activity enables firms to add incremental value by transforming inputs into goods and services.

Understand the Bathtub Metaphor in exhibit 4.6.

Each investment flow would be represented by a different faucet. How fast a firm is able to build an intangible resource—how fast the bathtub fills—depends on how much water comes out of the faucets and how long they are left open. The amount of water represents a firm's level of specific intangible resource stock.

Generally speaking, a firm's stock price increases only when what occurs?

Effective strategies to grow the business can increase a firm's profitability thus an increase in stock price.

What are entry barriers and the 7 types of entry barriers identified in the textbook? (Economies of scale, network effects, customer switching costs, capital requirements, advantages independent of size, gov't policy, and credible threat of retaliation).

Entry barriers are obstacles that determine how easily a firm can enter an industry that often predict profit potential. 1.Economies of scale are cost advantages that accrue to firms with larger output because they can spread fixed costs over more units and employ technology efficiently. 2.Network effects describe the value of a product or service for an individual user increases with the number of total users. 3.Switching costs are incurred by moving from one supplier to another. 4.Capital requirements describe the price of the entry ticket and how much capital is required to compete in the industry. 5.Advantages independent of size are advantages based on brand loyalty, preferential access to raw materials (ex: lithium-ion batteries for smart cars), favorable locations, and cumulative learning experiences. 6.Gov't policy which restrict or prevent be entrants. 7. Credible threat of retaliation by incumbent forms often deters entry. Example: price wars between AT&T and Comcast.

What are exit barriers and how do exit barriers impact the level of rivalry?

Exit barriers are obstacles that determine how easily a firm can leave an industry.

What is meant by the support activities of the value chain?

Firm activities that add value indirectly, but are necessary to sustain primary activities. Types include R & D, Information systems, HR, Accounting/Finance and infrastructures such as processes, policies, and procedures.

What are the four key questions of the framework?

How do customers view us? How do we create value? What core competencies do we need? How do shareholders view us?

How does industry growth directly affect the intensity of rivalry among competitors?

In periods of high growth, consumer demands rises and price competition among firms decreases. Rivals are focused on capturing part of that larger pie rather than market share.

What are shareholders?

Individuals or organizations that own one of more shares of stock in a public company.

What are industry effects? Firm effects? Each effect explains what percent of a firm's profitability? (See textbook exhibit 3.2)

Industry effects describe the underlying economic structure of the industry and attribute firm performance to the industry in which the firm competes. Firm effects attribute firm performance directly to the actions leaders take. It impacts up to 55% of a business, the industry impacts -20%, and other effects impact at -25%.

What is an industry? Industry analysis? Strategic position?

Industry is a group of incumbent companies that face more or less the same set of suppliers and buyers. Industry analysis is a method to identify an industry's profit potential and derive implications for a firm's strategic position.

What is producer surplus?

It also means price. It is the difference between price charged (P) and the cost to produce it (C). (P-C).

How does a fragmented industry differ from a consolidated industry?

It consists of many small firms and generates low profitability whereas consolidated industries is dominated by a few firms and can be highly profitable.

What is the value chain? What does a careful analysis of the value chain allow managers to do?

It describes the internal activities a firm engages in when transforming inputs into outputs. Careful analysis allows leaders to obtain a more detailed and fine-grained understanding of how the firm's economic value creation breaks down into distinct activities that help determine perceived value and the costs to create it.

What is the triple bottom line? What does each dimension represent?

It is a combination of economic (profits), social (people), and ecological (planet) concerns that can lead to sustainable energy.

What is the balanced scorecard?

It is a strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

How does total return differ from accounting data?

It is an external and forward-looking performance metric.

What is Intellectual Property (IP) protection and its intent?

It is an intangible resource that can help sustain a competitive advantage.

What is economic value created? How is it calculated?

It is the difference between value and cost. (V-C).

In which way(s) do firms making strategic commitments to compete in an industry impact the level of rivalry?

Likely to be more intense. Strategic commitments are firm actions that are costly, long-term oriented, and difficult to reverse.

What is Porter's five forces model? What two key insights does the model provide?

Porter's five forces model identifies five key competitiveness forces that strategic leaders need to consider when analyzing the industry environment. Competition is viewed more broadly in the five forces model and profit potential is a function of the five.

What is market capitalization? How is market capitalization calculated?

Market capitalization captures the total dollar market value of a company's outstanding shares at any given time. Market cap = # of outstanding shares X share price.

What is a mobility barrier? What is the mobility barrier in the U.S. Domestic Airline Industry?

Mobility barrier restrict movement between groups. The two groups within the airline industry is separated by international and domestic flights. If a carrier wanted to compete globally, it would likely need to change their point-to-point operating model and add a few profitable international routes.

Have intangible assets not captured in accounting data become more or less important in firms' stock market valuations of the past few decades?

More important in firms. Intangibles not captured by a firm's accounting data have become much more important to a firm's competitive advantage.

What is a valuable resource? How does it effect a firm's economic value creation (V-C)?

Once the enables the firm to exploit an external opportunity or offset an external threat. Revenues rise if a firm is able to increase the perceived value of its product or services.

What is meant by Organized to Capture Value?

Organized to capture value is one of the four key criteria in the VRIO framework. The characteristics of having in place an effective organizational structure, processes, and systems to full exploit the competitive potential of the firm's resources, capabilities, and competencies.

What are the five major forms of IP protection?

Patents, designs, copyrights, trademarks, and trade secrets.

What is path dependence? What are time compression diseconomies?

Path dependence describes a process in which the options on faces in a current situation are limited by decisions made in the past. It also rests on the notion that time cannot be compressed at will. Trying to achieve the same outcome in less time even with higher investments tends to lead to inferior results due to time compression diseconomies.

What are the four main competitive industry structures?

Perfect competition, monopolistic competition, oligopoly, and monopoly.

What are the characteristics of each of the following structures: Perfect competition? Monopolistic competition? Oligopoly? Monopoly?

Perfect competition: industry is fragmented and has many small firms, commodity product, easy of entry and little ability for each firm to raise prices. Monopolistic competition: many firms, differentiated product, ability to raise prices for a relatively unique product, and some obstacles to entry. Oligopoly: few large firms, differentiated product, high barriers to entry, some degree of pricing power. Monopoly: when there is only ONE. Firm offers unique product, it's a high challenge to move into the industry, and has high pricing powers so the industry profit tends to be high.

Are substitute products or services located inside or outside the given industry?

Products meet the same basic customer needs as the industry's product but in a different way. The threat of substitutes is the idea that products/services available from outside the given industry.

What is ROIC and why is it a popular metric for assessing firm financial performance?

ROIS stands for Return on Invested Capital. ROIC enables us to conduct direct performance comparisons between different companies. ROIC=Net Profits/Invested Capital. It's a good proxy for firm profitability.

Under what conditions is the relative bargaining power of buyers high (4 total)?

Relative bargaining power of buyers is high when 1. There are few buyers and each buyer purchases large quantities relative to the size of a single seller. 2. The industry's products are standardized or undifferentiated commodities. 3. Buyers face low of no switching costs. 4. Buyers can credibly threaten to backwardly integrate into the industry.

Under what conditions is the relative bargaining power of suppliers high (6 total)?

Relative bargaining power of suppliers is high when: 1. Supplier's industry is more concentrated than the industry it sells to. 2. Suppliers do not depend heavily on the industry on large portion of their revenues. 3. Incumbent firms face significant switching costs when changing suppliers. 4. Suppliers offer products that are differentiated. 5. No readily available substitutes that suppliers offer. 6. Suppliers can credibly threaten to forward-integrate into the industry.

What are the two critical assumptions of the resource-based model?

Resource heterogeneity and resource immobility.

What is resource heterogeneity? Resource immobility?

Resource heterogeneity is the assumption in the resource-based view that a firm is a bundle of resources and capabilities that differ across firms.

What is resource resource immobility?

Resource immobility is the assumption in the resource-based view that a firm has resources that tend to be "sticky" and do not move easily from firm to firm.

What is a resource? Can resources be tangible or intangible?

Resources can be both tangible and intangible and are any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy.

What are Resources flows? Resources stocks? Intangible resource stocks?

Resources flows is a firm's level of investments to maintain or build a resource. Resource stocks is the firm's current level of intangible resources.

What are total return to shareholders?

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

What is SWOT analysis? What does a SWOT analysis allow a managers to do?

SWOT analysis is a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses with those from an analysis of external opportunities and threats to derive strategic implications.

What are the six components for the PESTEL model?

Six factors that can affect its potential gain and sustain a competitive advantage: political, economic, sociocultural, technological, ecological, and legal. PESTEL is a framework that categorizes and analyzes an important set of external factors that might impinge upon a firm. These factors can create both opportunities and threats.

What is a business model?

Stipulates how the firm conducts its business with its buyers, suppliers, and partners in order to make money.

What are the three limitations of shareholder value creation?

Stock prices can be highly volatile, making it difficult o assess firm performance in the short term, overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices, and stock prices frequently reflect psychological mood of investors, which can at times be irrational.

What is a strategic group? Strategic group model?

Strategic group is the set of companies that pursue a similar strategy within a specific industry. Strategic group model is a framework that describes differences in firm performance within the same industry.

What are tangible resources? Intangible resources? How do they differ? Be familiar with examples of each listed in Exhibit 4.5.

Tangible resources have physical attributes and are visible (bldgs, plant, equipment). Intangible resources are the opposite (patents, trademarks, trade secrets, knowledge, culture).

Under what three conditions are buyers especially price sensitive?

The buyer's purchase represents a significant fraction of its cost structure or procurement budget, they earn low profits or strapped for cash, and the quality of the buyers' products and services is not affected much by the quality.

What is a strategic activity system?

The conceptualization of a firm as a network of interconnected activities.

What is value?

The dollar amount (V) a consumer attaches to a good or service; the consumer's willingness to pay. Also called reservation price.

What is reservation price? What is the relationship between reservation price and total perceived consumer benefits?

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

What are 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.

How can the five macroeconomic factors affect a firm strategy? (Growth rate, levels of employment, interest rates, price stability, and currency exchange rates)

The overall growth rate is a measure of the change in the amount of goods and services produced by a nation's economy. Looking at the real growth rate indicates its current business cycle which adjusts for inflation. Growth rates directly affect the levels of employment. In boom times, unemployment is high and in economic downturns it is on the rise. Interest rates are adjusted for inflation. Low real interest rates mean firms can borrow money to finance growth which reduces the cost of capital and enhances a firm's competitiveness. Price stability is rare, but it is the lack of change in price levels of goods and services. When there is too much money, we see inflation and vice versa. Currency exchange rates is a critical variable because it determines how many dollars a firm must pay for a unit foreign currency.

What kind of relationship between ROIC and cost of capital is needed for a firm to generate value?

The ratio measured how effectively a company uses its total invested capital which consists of shareholders' equity through the selling of shares to the public and interest-bearing debt through borrowing from financials institutions and bondholders.

Under what two conditions is the threat of substitutes high?

The substitute offers an attractive price-performance trade-off and the buyers cost of switching to the substitute is low.

What is opportunity cost?

The value of the best forgone alternative use of the resources employed.

What is the VRIO framework?

Theoretical framework that explains and predicts firm-level competitive advantage. Valuable, Rare and costly, Imitate, and Organized to capture the value of resources.

How do companies develop core competencies?

They create higher value for customers and offer products/services from those of its rivals at comparable lower costs.

In Strategy Highlight 5.2, how does Threadless leverage crowdsourcing in its business model?

Threadless leverages crowdsourcing, a process in which a group of people voluntarily performs tasks that were traditionally completed by a firm's employees. Rather than doing in-house work, they out-source its T-shirt design to its website community.

What are the five components of Porter's five forces model? What is the relationship between the strength of the forces and the industry's profit potential?

Threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing competitors. The stronger the five forces, the lower the industry's profit potential—making the industry less attractive for competitors. The weaker the five forces, the greater the industry's profit potential—making the industry more attractive.

What is threat of entry? In what two ways does potential new entry depress industry profit potential?

Threat of new entry describes the risk of potential competitors entering the industry. It reduces the industry's overall profit potential and increases spending among incumbent firms.

When competitive rivalry is based solely on price-cutting, most of the value created by the industry is transferred to whom?

Transferred to customers, leaving little for firms.

What are two integrative frameworks to assess firm performance, combining quantitative data and qualitative assessments?

Using accounting data to assess goal-directed actions a firm takes to gain and sustain competitive advantage. Financial data and ratios derived from available accounting data such as income statement and balance sheets.

What formula captures the relationship: economic value creation = consumer surplus + firm profit? (Exhibit 5.7 for visual conceptualization)

V = value = reservation price. C = firm's cost . P = Price. V-C = economic value created. V-P = consumer surplus. P-C = firm's profit. (V-C)=(V-P)+(P-C)

What is the significance of each of the following terms: ROR, COGS/Revenue, R&D/Revenue, SG&A expense/Revenue, working capital turnover?

Working capital turnover measures how effectively capital is being used to generate revenue. ROR indicates how much of the firm's sales is converted into profits. COGS/Revenue indicates how efficiently a company can produce a good. R&D/Revenue indicates how much of each dollar that he firm earns in sales is invested to conduct research and development. SG&A/Revenue indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative expenses.

Does intra-group rivalry generally exceed inter-group rivalry?

Yes, the rivalry among firms within the same strategic group is more intense than the rivalry among strategic groups.

What five concepts are discussed in the section relating to the "Dynamic Nature of Business Models"?

· Combination: combining two or more of the eight business models. Evolution: Base product is provided free, and the producer finds other ways the monetize the usage. Disruption: Taking advantage of the pricing flexibility inherent in the wholesale model and offering many products or services below the cost that other retailers had to pay. Response to disruption: Set a price for firm and receive 70% of the revenue. This gives producers the leverage to raise prices for retailers. Legal conflicts: Rapid development of business models, especially in response to disruption, can lead producers to breach existing rules of commerce.

Which eight business models are explained in the textbook?

· Razor-razor blades: product is sold at a loss or given away. Subscription: pay for access whether they use it or not. Pay-as-you-go: pay for only services they consume. Freemium: free of charge, but charges premium services for features and add-ons. Ultra-low cost: Basic services is provided at a low cost and extra items are sold at a premium. Wholesale: sell products or services at a fixed price and retailers are free to set their own prices. Agency: Producers relies on agent or retailer to sell product at a predetermined price. Bundling: sells products or services for which demand is negatively correlated at a discount.