Test 3 CAPSTONE

What 3 strategies may counter disruptive innovation?

1. Continue to innovate to stay ahead of the competition 2. Guard against disruptive innovation by protecting the low end of the market. 3. Disrupt yourself rather than wait for others to disrupt you.

What are the characteristics of an industry in the introductory stage?

1. Core Competency: research and development Necessary to create a product category that will attract customers Can be very capital-intensive (high costs) 2. Barriers to entry are high 3. Strategic objective: market acceptance and future growth.

What are the potential benefits of vertical integration?

1. Lowering costs 2. Improving quality 3. Facilitating scheduling and planning 4. Facilitating investments in specialized assets: Co-located assets, unique equipment, human capital. 5. Securing critical supplies and distribution channels

What are the two variables and four main types of diversification in Rumelt's classification scheme?

1. Single Business: low level of diversification 2. Dominant business: Additional business activity pursued 3. Related diversification: Constrained: All businesses share competencies Linked: Some businesses share competencies 4. Unrelated diversification (conglomerate): No businesses share competencies.

What is a short term contract? RFP?

A firm sends out requests for proposals (RFP) to several companies, which initiates competitive bidding for contracts to be awarded with a short duration.

What is the principal-agent problem? What is one potential way to overcome this problem?

A major disadvantage of organizing economic activity within firms Principal- the owner of the firm -Goal: create shareholder value Agent-manager or employee -Should act on behalf of the principal Problem: Agents pursue their own interests One solution: Stock options to make agents owners

What is transaction cost economics?

Associated with an economic exchange. A theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage

What is a diversification discount? Diversification premium? What is the Diversification-Performance Relationship (Exhibit 8.11)?

Diversification discount: Situation in which the stock price of highly diversified firms is valued less than than the sum of their individual business units Diversification premium: Situation in which the stock price of related diversification firms is valued greater than the sum of their individual business units.

What is an entrepreneur? What is an intrapreneur?

Entrepreneur: The agents that introduce change into the the competitive systems. Intrapreneur: Those pursuing corporate entrepreneurship.

What is innovation? What are first mover advantages? What are the types of first mover advantages?

Innovation: The commercialization of any new product or process, or the modification and recombination of existing other ones. First Mover Advantage: Competitive benefits that accrue to the successful innovator. Advantages: network effects, economies of scale, learning-curve effects

What are the five stages in the industry life cycle?

Introduction Growth Shakeout Maturity Decline

What is innovation? What does innovation allow firms to do in regards to competitive advantage?

It can create and destroy value. Often comes in waves Initial innovations are foundational for other rapid innovation

Why are KFC and Chic-fil-a pursuing different corporate strategies?

Ownership structure KFC is publicly traded stock company Chic-fil-a is privately owned

What is restructuring?

Reorganizing and divesting business units and activates. Helps refocus a company Helps leverage core competencies more fully Helpful reconstructing tool: BCG growth-share matrix

What type of curve illustrates the development of most industries?

S curve

Relating to costs, under what cost conditions should a firm vertically integrate?

if costs in house < costs market Own production of the inputs Or own output distribution channels

What is strategic entrepreneurship?

the pursuit of innovation using tools and concepts from strategic management Combining entrepreneurial actions Creating new opportunities Exploiting existing opportunities

When does a firm fall into the large competitive chasm between early adopters and the early majority?

when the enthusiasts decide to back it or not

What is fully vertically integrated?

you produce the inputs yourself and you do every stage of the value chain yourself all the way to the final consumer

What three characteristics of idea are necessary to be considered an innovation (See exhibit 7.3)?

Novel, Useful, Implemented

Which three benefits must diversification achieve in order to enhance firm performance?

1. Provides economies of scale (reduces cost) 2. Exploits economies of scope (increases value) 3. Reduces costs and increase value

What is a platform ecosystem and its advantages?

The market environment in which all players participate relative to the platform. 1. Platforms scale more efficiently than pipelines by eliminating gatekeepers 2. Platforms unlock new sources of value creation and supply. 3. Platforms benefit from community feedback

What are network effects? How did Apple leverage network effects?

The positive effect (externality) that one user of a product or service has on the value that product from other users. By creating products that only worked with other apple products.

How does the crossing-the-chasm framework apply to the mobile phone industry?

The typical chasm between early adaptors and early majority, but with other mini chasms for each stage. Went from radio towers to satellites, killed Iridium. Treo had a great start, but couldn't have too many apps, was trapped with Sprint, and couldn't expand. BlackBerry was backed by early adopters and corporate executives, had real time emails and other real time items. iPhone took over since it was almost comparable to BlackBerry, but more fun with pictures and internet and games. Other phones such as Galaxy and Samsung imitated it and enjoyed the benefits too

In the US, how long is the time period for the right to exclude others from the using patented technology?

20 years

What is a conglomerate?

A company that combines two or more strategic business units under one overarching corporation, follows an unrelated diversification strategy.

What is imitation? How have competitors imitated Netflix?

Copying another idea, and making it their own More streaming services came out and had other exclusive shows

What is the BCG Growth Matrix? What are recommendations relating to each of the four quadrants of the matrix?

Guides portfolio planning

What is an idea? Invention? Patent trade secret?

Idea: Often presented in terms of abstract concepts or as findings derived from basic research. Invention: Transformation of an idea to a new product or process, or the modification and recombination of existing ones. Patent trade secret: valuable propriety information that is not in the public domain and where the firm makes every effort to maintain its secrecy.

What alternatives to vertical integration exist?

Taper Integration Strategic Outsourcing

What is taper integration? Strategic outsourcing? Offshoring?

Taper Integration: Backward or forward integrated, plus reliance on outside firms such as suppliers or distributors. Strategic Outsourcing: Moving internal value chain activities to other firms (HR management system)

What is social entrepreneurship? What are examples of social entrepreneurship ventures?

The pursuit of social goals while creating profitable businesses. Evaluate performance by financial, ecological and social contribution metrics. Wikipedia: provide knowledge on very large scale

What are the industry characteristics of the shakeout stage? Who tend to be the winners in this stage?

The rate of growth declines Firms begin to intensely compete Weaker firms forced out Industry consolidation Only the strongest competitors survive Price is an important competitive weapon

For which five reasons does firms need to grow?

To increase profits and shareholder returns To lower costs and achieve economies of scale To increase market power To reduce risk through diversification To motivate management

Which three questions do executives answer to determine their corporate strategy?

Vertical integration Diversification Geographic scope

What is backward vertical integration? Forward vertical integration?

Backward: Owning inputs of the value chain Forward: Owning activities closer to the customer

What are winner-take-all markets? What is an example of the concept?

Markets where the market leader captures almost all the market share and is able to extract a significant amount of the value created

What is reverse innovation?

An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes called frugal innovation.

What are internal capital markets?

Can be a source of value creation in diversification strategy A way to allocate capital at a lower cost, if more efficient than external markets A related-diversification strategy can enhance corporate performance Consider coordination and influence costs

What is the Geoffrey Moore's crossing-the-chasm framework? Each stage of the industry life cycle is dominated by which difference?

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group.

What is an unrelated diversification strategy?

Corporate strategy in which firm derives less than 70 percent of its revenues from a single business and there are few if any linages among its businesses

What are the risks for vertical integration?

Increasing costs Reducing quality Reducing flexibility Increasing the potential for legal repercussions

What are the different type of innovations in the markets-and-technology framework (Exhibit 7.11)?

Incremental vs. Radical Architectural vs. Disruptive

How do incremental and radical innovation differ? What are examples of each?

Incremental: Builds on established knowledge, results from steady improvement. Radical Innovation: Novel methods and materials, entirely new knowledge base or recombination of existing knowledge, targets new markets and technology.

How do incentives for incumbent firms and entrepreneurial ventures differ?

Incumbent firms: incremental innovations strengthen the firm position and create barriers of entry entrepreneurial ventures: Successfully commercializing a radical innovation is frequently the only option to enter an industry protected by high entry barriers.

How did the invention of the standardized shipping container transform global trade?

Made it easier to transport, cut down on theft, and became more efficient to load and unload. can have more ships at ports and travel time by ocean cut in half. Cost of shipping fell rapidly. Helped just in time businesses.

What are the industry characteristics of the maturity stage? Firms that survive the maturity stage tend to possess which two characteristics?

Only large firms remain They enjoy economies of scale Process innovation has reached a maximum Demand: replacement or repeat purchases Market has reached maximum size. Industry growth is zero or negative

What is organizational inertia? Innovation ecosystem?

Organizational inertia: As firms become established and grow, they rely more heavily on formalized business processes and structures, creating a resistance to changes in he status quo. Innovation ecosystem: A firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making.

What is a product diversification strategy? Geographic diversification strategy? Product-market diversification strategy?

Product diversification: Increase in variety of products/services Active in several markets Geographic diversification: Increase in variety of markets/geographic regions Regional, national, or international markets Product-market diversification: Product and geographic diversification.

What is a related diversification strategy? What are the two variations of the strategy? (related-constrained and related linked).

Related diversification strategy: corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity Related-constrained: executives pursue only businesses where they can apply the resources and core competencies already available in the primary business. Related linked: executives pursue various businesses opportunities that share only a limited number of linkages

What are the alternatives on the Make-or-Buy spectrum? What are the benefits and drawbacks of each?

Short term Advantage: allows a somewhat longer planning period than individual market transactions. buying firm can often demand lower prices due to the competitive bidding process. Drawback: firms responding to the RFP have no incentive to make any transaction-specific investments. Strategic alliances Advantage: longterm contracts, equity alliance Drawback: more to handle

What is a single business firm? Dominant business?

Single Business Firm: Characterized by a low level of diversification, if any, because it derives more than 95 percent of its revenues from one business Dominant Business: Derives between 70-95 percent of its revenues from a single business, but it pursues at least one other business activity that accounts for the remainder of revenue.

What is a strategic alliance? Long-term contract? Licensing? Franchising? Equity Alliance? Credible Commitment? Joint venture? Parent-subsidy relationship?

Strategic alliance: Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products or services Long-term contract: like short-term contracts, but with a duration generally longer than one year. Licensing: A form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property Franchising: A long-term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business process to offer Equity alliance: A partnership in which at least one partner takes partial ownership in the other partner. Credible commitment: A long-lasting strategic decision that is both difficult and costly to reverse Joint venture: A standard alone organization created and jointly owned by two or more partners Parent-subsidy relationship: the most integrated alternative to performing an activity within one's own firm boundaries

What is corporate strategy?

The decisions that leaders make Goal-directed actions that they make in the quest for competitive advantage

What are transaction costs? External transaction costs? Internal transaction costs?

Transaction costs: All internal and external costs associated with an economic exchange, whether within a firm or in markets External transaction costs: Costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract Internal transaction costs: Costs pertaining to organizing an economic exchange within an hierarchy: also called administrative costs

What are specialized assets? What are the three types of specialized assets?

Unique assets with high opportunity cost: they have significantly more value in their intended use than in their next best use. 1. Site specificity 2. Physical-asset specificity 3. Human asset specificity

What are the four steps in the innovation process?

idea, invention, innovation, imitation

How does the level of product and process innovation change of the industry life cycle (Exhibit 7.7)?

innovation is way higher for product innovation, new features increase perceived customer value. Process innovation is minimum at the beginning.

What are the characteristics of an industry in the growth stage? What is a standard?

1.Demand increases rapidly First time buyers rush to repurchase Proof of concept has been demonstrated 2. Product/service standards emerge A common set of features and design choices Can emerge from competition or imposed by government agencies 3. Product innovation New/recombined aspects of a product 4. Process innovation: New ways to produce a product. Standard: An agreed-upon solution about a common set of engineering features and design choices.

What are the characteristics of the 5 customer groups described in the crossing-the-chasm framework?

1.Technology enthusiasts: Enter the market during the introductory stage (2.5%), have an engineering mind, proactively pursue new technology, enjoy using beta versions, tinker with product imperfections, provide free feedback and suggestions. 2.Early Adopters: Enter the market during the growth stage (13.5%), Demand is driven by imagination and creativity, to capture: directly communicate the products' potential 3.Early Majority: Enter the market during the shakeout stage (34%), Decision criteria, a strong sense of practicality, what can this do for me, weigh the benefits and costs carefully, rely on endorsements of others, the key to catching the growth wave. 4. Late Maturity: Enter the market during the maturity stage (34%), Not as confident in their ability to master the technology, wait until standards have emerged, do not like uncertainty, represent the majority of the market, buy from well-established firms with a strong brand. 5. Laggards: Enter the market during the decline stage (16%), Adopt a new product only if necessary, generally do not want new technology, typically not pursued as future customers, demand is small, early and late majority have moved on

What are information asymmetry? What is a lemons problem? Caveat emptor?

A situation in which one party is more informed than another, due to the process of private information. Can result in the crowding out of desirable goods and services by inferior ones Bad car (lemons) are 4,000 and good cars are 8,000, buyers split the difference and buy cars at 6,000 for a better chance at a good car, but only get lemons. Caveat emptor: buyer beware.

What are the advantages and disadvantages of organizing economic activity within the firm?

Advantages: Command and control -Fiat -Hierarchical lines of authority Coordination Transaction-specific investments Community of knowledge Disadvantages: Administrative costs Low-powered incentives Principle agent problem

What are the advantages and disadvantages of using markets?

Advantages: High-powered incentives Flexibility Disadvantages: Search costs Opportunism -Hold-up Incomplete contracting -Specifying and measuring performance -information asymmetries Enforcement of contracts

What is a platform business and the three dimensions that define a platform business?

An enterprise that creates value by matching external producers and consumers in a way that creates value for all participants, and that depends on the infrastructure or platform that enterprise manages. 1. A business that enables value-creating interactions between external producers and consumers. 2. The platform's overarching purpose is to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants. 3. The platform provides an infrastructure for those interactions and sets governance conditions for them.

What is diversification? How do non-diversified and diversified companies differ?

An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes. A non-diversified company focuses on a single market, whereas, a diversified company competes in several different markets simultaneously

How do architectural and disruptive innovation differ?

Architectural: Existing technology leveraged into a new market. Known components, existing technology, used in a novel way. Disruptive: Leverages new technologies in existing markets. New product/process meets existing customer needs

What are the industry characteristics of the decline stage? Which four strategic options do firms have at this stage?

Decline falls rapidly Innovation efforts cease If a breakthrough emerges, it leads to a new industry or resets the life cycle Strong pressure on prices 1. Exit: bankruptcy/liquidation 2. Harvest: reduce further investments 3. Maintain: support at a given level 4. Consolidate: buy rivals

What is product innovation? What is process innovation?

Product innovation: New/recombined aspects of a product Process innovation: New ways to produce a product.

What is vertical integration? What is the industry value chain (vertical value chain)?

The ownership of inputs or distribution channels What percentage of a firm's sales is generated within the firm's boundaries? Backward: Owning inputs of the value chain Forward: Owning activities closer to the customer Backward and forward Vertical Value Chain 1. Raw materials 2. Intermediate goods and components 3. Final Assembly and manufacturing 4. Marketing, sales, after-sales service and support Backward and forward value chain w/Industry value chain 1. Design 2. Manufacturing 3. Marketing and Sales 4. After-Sales Service and Support

What is entrepreneurship? How did the following entrepreneurs achieve success: Reed Hastings, Jeni Bauer, Dr. Dre, Jeff Bezos, Elon Musk, Jimmy Wales?

The process by which change agents undertake economic risk to innovate. Create new products, processes and organizations Create value for society Commercialize ideas and innovations Reed Hastings: Got tired of late fees and had mail-in DVD rentals that had no late fee, then went to digital with it's current subscribers and then became big. Jeni Bauer: Played around with some essential oils in ice cream and found out that it was perfect for the sents and made unique ice cream after learning how to make it and a few failed ventures, she became a hit. Dr. Dre: focused on music and entertainment in high school and became a DJ. Joined a band and became a famous rapper. Strong work ethic and attention to detail, created beats and Straight out of Compton. Jeff Bezos: founder of Amazon, a degree in computer science and electrical engineering, financial analysis on Wall Street. Knew the internet was blowing up and used it as a distribution channel for books, and branched out from there. Elon Musk: engineer and serial entrepreneur wanting to solve environmental, social, and economic challenges. Leader of Tesla. Left South Africa at 17, went to Canada and US for a bachelor's degree in economics and physics. Spent two days in his PhD program for applied physics and material science before creating Zip2, online provider for content publishing software for news organizations. Got bought out and it became HP. Co-funded PayPal, and then got bought out from eBay. This funding help create Space X Jimmy Wales: Founder for Wikipedia, social entrepreneur. Educated by his mom and grandmother, dropped out of a doctoral program in economics, and got a job at a stock brokerage firm. In the evenings, wrote code for fun and built a web browser. Was the first to grasp the power of an open-source method to provide large-scale knowledge. Free for people to edit and learn.