Strategic Management - Exam 2

Power of Buyers

Concerns the pressure an industry's customers can put on the producer's profit margin by DEMANDING LOWER PRICES or HIGHER QUALITY Lower demanded prices reduce a firm's ability to charge higher prices Higher demanded quality reduces a firm's ability to cut expenses

Value Chain

-Analyzing a firm's value chain allows managers a finer-grained understanding of the firm's NET VALUE CREATION Net VC = Value Created (V) - Costs of Creating Value (C) -Add incremental value to the product or service offering OR -Lower relative costs

Rivalry Among Existing Competitors

-COMPETITIVE RIVALRY is an INTERNAL INDUSTRY PRESSURE -Describes the intensity of competition between firms IN THE SAME INDUSTRY as they jockey for market share and profitability -Ranges from low/gentle to high/cut-throat -High competition can create unfavorable pricing as industry incumbents attempt to lure customers away from competitors

Two Assumptions of RBV

-Resource Heterogeneity—each firm has different sets of resources I.e. While SWA and JetBlue compete in the same strategic group, they draw on different resources to create customer value -Resource Immobility—resources can't be easily moved between firms As a result, resource differences are difficult to replicate and long-lasting

Industry Environment

A group of incumbent firms that generally provide similar goods and services the general conditions for competition that influence all businesses that provide similar products and services

Primary Activities (Value Chain)

Add value directly as the firm transforms inputs to outputs •Includes (1) supply chain management, (2) operations, (3) distribution, (4) marketing & sales, and (5) after-sales service

Secondary Activities (Value Chain)

Add value indirectly by supporting each of the primary activities •Includes (1) R&D, (2) information systems, (3) human resources, (4) accounting & finance, and (5) firm infrastructure

Porter's Five Forces

Also known as Industry and Competitive Analysis. A framework considering the interplay between (1) The threat of new entrants (2) The bargaining power of suppliers (3) The bargaining power of buyers (4) The threat of substitute goods or services (5) The intensity of rivalry among existing competitors

Internal Analysis

Analyzing the firms internal environment -A firm's goal should be to develop resources, capabilities, and competencies that create a STRATEGIC FIT with a firm's external environment -Strategic fit should be DYNAMIC and adapt to changes in the external environment

Resources

Any ASSET that a company can draw on when crafting and executing a strategy •Tangible resources—physical resources such as cash, plant/machinery, etc •Intangible resources—non-physical resources that can be difficult to quantify such as patents, trademarks, copyrights, trade secrets, reputation, etc.

Sociocultural Factors (PESTEL)

Captures a society's cultures, norms, and values, such as: Demographic trends.

Power of Suppliers

Captures pressures that industry suppliers can exert on industry's profit potential Powerful suppliers can RAISE THE COSTS of production by demanding higher prices for their products They can also REDUCE THE QUALITY of their products

Shapes Strategic Decisions

Enable or constrain the goals set by strategic leaders

External Environment

External conditions and forces that have potential influence on a firm

Mobility Barriers

Industry-specific factors that: •Separate strategic groups from others •Restrict movement between groups

Government Policy (Barrier to Entry)

Laws and regulations that restrict or make it difficult for firms to enter an industry I.e. Wright Act of 1979 restricted SWA to very limited air travel

Economic Factors (PESTEL)

Macroeconomic factors that can effect a firm strategy, such as: Growth Rates, Interest Rates, Levels of Employment, Price Stability, and Currency Exchange Rates

Capabilities

Organizational and managerial SKILLS necessary to strategically manage a diverse set of resources •Essentially what a firm can do with the resources they possess •I.e. rapid assembly, new product development, customer service, etc •A DYNAMIC CAPABILITY is when a firm has the skills to continually refine and update its array of capabilities to keep pace with its environment

Source of Resources

Provides organizations important resources, including inputs, capital, labor, and customers

Strategic Groups

Sets of firms within the same industry that pursue a similar strategy -Strategic groups differ along dimensions such as R&D, technology, product differentiation, prices, product breadth, distribution channels, etc -I.e. An automotive strategic group includes Honda, Toyota, and Nissan, who have similar product offerings and similar prices

Capital Requirements (Barrier to Entry)

The Price of Entry: Tangible: real costs ($) of setting up production, marketing, etc I.e. cost of building a production facility Intangible: necessary legitimacy needed to establish relationships with suppliers and buyers I.e. Do your customers see you as a legitimate producer of X?

Economies of Scale (Barrier to Entry)

factors that cause a producer's average cost per unit to fall as output rises

Legal Factors (PESTEL)

include the official outcomes of political processes as manifested in laws, mandates, and court decisions—all of which can have a direct bearing on a firm's profit potential. Such as discrimination laws, minimum wage, employment laws

Network Effects (Barrier to Entry)

increases in the value of a product to each user, including existing users, as the total number of users rises

Political Factors (PESTEL)

result from the processes and actions of government bodies that can influence the decisions and behavior of firms

Access to Distribution Channels (Barrier to Entry)

the new entrant's need to secure distribution for its product can create a barrier to entry

Threat of Substitutes is High When

•A viable substitute offers an attractive price-performance tradeoff •A buyer's switching costs to substitute is low I.e. many with simple 1040s are likely to easily adopt TurboTax software because the process/software is simple to use

Intensity of Competitive Rivalry is Determined By

•Industry structure •Industry growth •Strategic commitments •Exit barriers

The Power of Suppliers is High When

•The suppliers' industry is more concentrated (fewer suppliers) •Suppliers do not depend heavily on industry for revenues •Incumbent firms face high switching costs when changing suppliers •Suppliers offer products that are sufficiently differentiated •No readily-available substitutes for the products offered by suppliers •Suppliers can make credible threats to forward integrate

The Power of Buyers is High When

-There are a few buyers and each buyer purchases large quantities relative to the size of a single seller -The industry's products are standardized or undifferentiated commodities -Buyers face low or no switching costs -Buyers can credibly threaten to backwardly integrate into the industry

Source of Opportunities and Threats

1.) Opportunities are events and trends that create chances to improve performance (demand for healthy fast food created BurgerFi) 2.) Threats are events and trends that undermine performance

Applying the Five Forces Model

1.Define the relevant industry •What industry? Who is included in the industry? 2.Identify the key players in each of the five forces and attempt to categorize •I.e. differentiating the larger suppliers/buyers from smaller ones 3.Identify the underlying drivers of each force •Which are strong? Which are weak? Why? 4.Assess the overall industry structure •What is the general condition? What is the profit potential?

Customer Switching Cost (Barrier to Entry)

A barrier to entry created by fixed costs that buyers encounter if they changed the supplier of a particular product or service

Threat of Substitutes

The idea that products or services available from OUTSIDE THE GIVEN INDUSTRY will come close to meeting the needs of current customers I.e. tax software products such as TurboTax are substitutes for using a CPA or other tax professional I.e. Dish Network and DirecTV are substitutes to cable television

VRIO Framework

The resource-based framework that focuses on the value (V), rarity (R), imitability (I), and organizational (O) aspects of resources and capabilities. •Valuable - improves organizational effectiveness and efficiency while neutralizing the effectiveness of competitors •Rare - resources that few others possess •Difficult to imitate - resources that are difficult for others to re-create •Nonsubstitutable - resources for which there are few to no alternatives

Threat of Retaliation (Barrier to Entry)

Threat of anticipated retaliation of incumbent firms I.e. Nike reduced prices below Under Armor's optimal prices when they entered market to (1) reduce profitability and (2) force UA to signal lower quality

Resource-Based View

Views resources as key to superior firm performance •RBV more broadly defines "resources"—an asset/capability/competency that a firm can draw upon when formulating/implementing a strategy

Technological Factors (PESTEL)

capture the application of knowledge to create new processes and products

Ecological Factors (PESTEL)

concern broad environmental issues such as the natural environment, global warming, and sustainable economic growth