BUAD441 midterm essay

Identify and describe the three major parts of the external environment. What is the purpose of the firm's collecting information about these aspects of its environment?

1) General environment: composed of segments: - demographic - economic - political/legal - sociocultural - technological - global 2) Industry environment: 5 forces - threat of new entrants - power of suppliers - power of buyers - threat of product substitutes - the intensity of rivalry among competitors 3) Competitor environment: the firm must be able to predict competitors' actions, responses, and intentions.

Describe and discuss the four activities of the external environmental analysis process.

1) Scanning: the study of all segments of the general environment in order to detect changes that may occur in the future or are already occurring. 2) Monitoring: observe environmental changes to see if an important trend is emerging from those spotted by scanning. 3) Forecasting: builds on scanning and monitoring to develop feasible projections of what might happen, and how quickly it will occur. 4) Assessing: the analyst determines the timing and the significance of the effects of environmental changes and trends on the strategic management of the firm.

Describe the seven segments of the general environment.

1) The demographic segment encompasses factors such as population size, geographic distribution, age structure, ethnic mix, and income distribution. 2) The economic segment involves the nature and direction of the economy in which a firm competes or may compete, domestic as well as global. 3) The political/legal segment is the arena in which organizations compete for attention, resources, and a voice in laws and regulations guiding the interactions among nations. 4) The sociocultural segment is concerned with society's attitudes and cultural values. 5) The technological segment includes institutions and activities involved with creating new knowledge and transforming it into new outputs, products, processes, and materials. 6) The global segment includes new global markets, existing markets that are changing, international political events, and critical cultural and institutional characteristics of global markets. 7) The physical segment includes potential and actual changes in the physical environment (such as global warming) and business practices that are intended to positively deal with those changes (such as control of carbon emissions and other environmentally friendly actions).

Identify the five forces that underlie the five forces model of competition. Explain briefly how they affect industry profit potential.

1) Threat of new entrants: New entrants threaten existing firms' market share. They increase production capacity in an industry which results in lower profits for all firms, unless demand is increasing. The new entrant may force the existing firms to be more effective and efficient in production, and to compete on new dimensions. 2) Power of suppliers: Suppliers with high power can increase prices and decrease the quality of their products sold to the firm. If firms are unable to pass along price increases to customers, their profits diminish. 3) Power of buyers: When buyers (customers) have high power they can force prices down, and require increases in quality and service levels, thus driving profits down. 4) Substitutes: Substitutes perform the same or similar functions of the firm's product. The price of the substitute places an upper limit on prices firms can charge for the original product, limiting industry profits. 5) Intensity of competitive rivalry affects the firm's ability to make a profit as competitors' actions challenge the firm or competitors try to improve their market position. Increasing rivalry reduces the ability of weaker firms to survive.

Describe a value chain analysis. How does a value chain analysis help a firm gain competitive advantage?

A value chain analysis allows a firm to understand the activities that create value for the firm and those that do not. A value chain follows the product from its raw-material stage to the final customer. The purpose is to add as much value as possible as cheaply as possible and to capture that value. To conduct a value chain analysis, managers should study and identify all activities of the firm and evaluate their impact on the effort to create value for the customer. Two central activities in a value chain: 1) Primary activities: involved in a product's physical creation, its sale and distribution, and its service after the sale 2) Support activities: necessary for the primary activities to take place

Why is it important to prevent core competencies from becoming core rigidities?

All core competencies have the potential to become core rigidities and to generate failure. Each competence is a potential weakness if it is emphasized when it is no longer competitively relevant. The success that the competence generated in the past can generate organizational inertia and complacency. A core competence can become obsolete if competitors figure out a better way to serve the firm's customers, if new technologies emerge, or if political or social events shift in the external environment. If the organization's managers react to these changes with inflexibility and strategic myopia, then core rigidities are created.

Explain the relationship of the strategic management process to organizational ethics.

Almost all strategic management process decisions have ethical implications because they affect stakeholders. The decision of the strategic leaders influence the organization's culture which is based on the organization's core values (which are also influenced by the strategic leaders). The organization's culture can be functional or dysfunctional, ethical or unethical. Consequently, the strategic leader's role has a large impact on whether the organization is a good citizen.

Describe the importance of internal analysis to the strategic success of the firm.

By analyzing its internal environment, a firm determines what actions it can take based on its unique resources, capabilities and core competencies. The firm's core competencies are the source of the firm's competitive advantage. Internal analysis allows the firm to compare what it is capable of doing (what it "can do") with what it "might do" (which is a function of opportunities and threats in the external environment). Matching what a firm can do with what it might do allows the firm to develop its vision, pursue its strategic mission, and select and implement its strategies. This allows the firm to leverage its unique bundle of resources and capabilities to gain competitive advantage.

Define capabilities and how they affect the firm's strategic success.

Capabilities exist when resources have been purposely integrated to achieve a specific task or tasks. Examples: HR activities, product marketing, R&D. Capabilities are based on developing, carrying, and exchanging information and knowledge through the firm's human capital. Many of the firm's capabilities are based on the unique skills and knowledge of its employees and their functional expertise. The knowledge possessed by human capital is among the most significant of a firm's capabilities. Capabilities are often developed in specific functional areas or in part of a functional area.

What do firms need to know about their competitors? What legal and ethical intelligence gathering techniques can be used to obtain this information?

Competitor analysis helps firms identify: 1) what drives the competitors by understanding the competitor's FUTURE objectives); 2) what the competitor is doing and is capable of doing by understanding the competitor's CURRENT STRATEGY; 3) what the competitor believes about the industry by understanding the ASSUMPTIONS made by the competitor; and 4) what the competitor's CAPABILITIES are by understanding the competitor's strengths and weaknesses. Firms can legally and ethically gather public information, such as annual reports, SEC reports, UCC filings, court records, and advertisements. Firms can also attend trade fairs to obtain competitors' brochures, view exhibits, and discuss products. This data combines to form competitive intelligence.

What are high exit barriers and how do they affect the competition within an industry?

Exit barriers are economic, strategic, and emotional factors causing companies to remain in an industry, even though the profitability of doing so is in question. The following are common sources of exit barriers: 1) specialized assets which cannot be used in another business or location; 2) fixed costs of exit, such as labor agreements which penalize a firm for ceasing operation; 3) strategic interrelationships or mutual dependence of business units wherein one business of a corporation serves another corporate business; 4) emotional barriers that cause owners to be sentimentally attached to the business or to their own role in it; 5) government and social restrictions that prevent a firm from closing, often in order to prevent the loss of jobs in a country or community.

Hypercompetition is a characteristic of the current competitive landscape. Define hypercompetition and identify its primary drivers. How can organizations survive in a hypercompetitive environment?

Hypercompetition is a condition of rapidly escalating competition based on price-quality positioning, competition to create new knowledge and establish first-mover advantage, and competition to protect or invade established product or geographic markets. In hypercompetition, firms aggressively challenge their competitors. Markets are assumed to be inherently unstable and changeable. The two primary drivers of hypercompetition are the global economy and rapid technological change. To survive in a hypercompetition environment firms need strategic flexibility. This demands continuous learning which allows the firm to develop new skills so that they can adapt to the changing environment and to consistently engage in change.

Describe the four specific criteria that managers can use to decide which of their firm's capabilities have the potential to create a sustainable competitive advantage.

Managers must identify whether their firm has capabilities that are valuable and nonsubstitutable from the customer's point of view, and unique and inimitable from the firm's competitors' point of view. Only capabilities with these four characteristics are core competencies that can lead to sustainable competitive advantage: 1) Valuable 2) Rare 3) Costly-to-imitate 4) non-substitutable

Explain why it is important for organizations to analyze and understand the external environment.

Organizations do not exist in isolation. The external environment of the organization presents threats and opportunities which the organization must address in its strategic actions. Parts of the organization's external environment are changing rapidly, such as technology, and the organization must constantly adjust to these changes. The information that the organization gathers about competitors, customers and stakeholders is used to build the organization's capabilities or to build relationships with stakeholders in the external environment. The information that the organization gathers about the external environment must be matched with its knowledge of its internal environment to form vision, to develop its mission, and to take actions that result in strategic competitiveness and above-average returns.

What are the differences between tangible and intangible resources? Which category of resources is more valuable to the firm?

Resources are either tangible or intangible. Tangible resources are those assets that can be observed and quantified. There are 4 types of tangible assets: 1) financial resources (borrowing capacity, ability to generate internal funds); 2) physical resources (plant and equipment, access to raw materials); 3) technological resources (patents, trademarks, copyrights, and trade secrets); 4) organizational resources (formal reporting structure, planning, controlling and coordinating systems). Intangible resources are those assets in the firm that are less visible. There are 3 types of such resources: 1) human resources (knowledge, trust, management capabilities, and organizational routines), 2) resources for innovation (ideas, scientific capability, and capacity for innovation), and 3) reputation (reputation with customers, i.e., the firm's brand name and perceptions of product quality, and relationships with suppliers). Intangible assets develop over time and are deeply rooted in the organization's history. Consequently, they are difficult for competitors to analyze and imitate. In addition, intangible resources can be leveraged to create new value to the firm. These properties give intangible resources a greater ability to create sustainable competitive advantage than do tangible resources.

Describe an organization's various stakeholders and their different interests. Under what condition can the firm most easily satisfy all stakeholders? If the firm cannot satisfy all stakeholders, which ones must it satisfy in order to survive?

Stakeholders are the individuals and groups who can affect and are affected by the strategic outcomes achieved and who have enforceable claims on a firm's performance. There are 3 principal types of stakeholders: 1) Capital market stakeholders: the shareholders and the major suppliers of capital to the firm. They are most interested in the return on capital in relation to the risk incurred. 2) Product market stakeholders: customers, suppliers, host communities, and unions representing workers. The customers seek a reliable product at the lowest possible price. The suppliers seek loyal customers willing to pay the highest sustainable price. Host communities want companies willing to be long-term employers and providers of tax revenues. Union officials want secure jobs with good working conditions for the workers they represent. 3) Organizational stakeholders: employees (managerial and non-managerial). These stakeholders expect a firm to provide a dynamic, stimulating, and rewarding work environment. The firm can most easily satisfy all stakeholders if it earns above average returns. If the firm does not earn above-average returns, it must prioritize its stakeholders by their power, urgency, and degree of importance to the firm. The firm must then make trade-offs among the stakeholders.

Define strategic competitiveness and above-average returns. What is the relationship between strategic competitiveness and returns on investment?

Strategic competitiveness is achieved when the firm successfully formulates and implements a value-creating strategy. Above-average returns are in excess of what investors expect to earn from other investments with similar risk levels. Firms will only be able to earn above-average returns if they develop a competitive advantage. Competitive advantage derives from a strategy that competitors cannot duplicate or find too costly to imitate.

Describe the industrial organization (I/O) model of above-average returns. What are its main assumptions? What is the key to success according to the I/O model?

The I/O model of above-average returns argues that the external environment is the primary determinant of firm success, rather than the firm's internal resources. The model has 4 underlying assumptions: 1) The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. 2) Most firms competing within a particular industry, or in a certain segment of the industry, are assumed to control similar strategically relevant resources and pursue similar strategies in light of those resources. 3) Resources used to implement strategies are mobile across firms, which results in resource differences between firms being short-lived. 4) Organizational decision makers are assumed to be rational and committed to acting in the firm's best interests as shown by their profit maximizing behaviors. The key to success according to the I/O model is to find the most attractive industry (the one with the highest profit potential) in which to compete.

Describe the factors that raise the competitive nature of an industry's rivalry.

The competitive rivalry in an industry can be based on price, product quality, and product innovation in attempt to differentiate the firm's product from its rivals' products. The factors that can increase competitive rivalry include: 1) numerous and equally balanced competitors 2) slow or no industry growth 3) high fixed costs, high storage costs of inventory, or perishable products 4) lack of differentiated products or low cost of product switching by customers 5) high strategic stakes for the competitors 6) high barriers for firms wishing to exist the industry, causing firms to remain in an industry where they cannot reasonably expect to make a profit

What is a firm's strategic group? What effect does the strategic group have on the firm?

The firm's strategic group is the set of firms that emphasize similar strategic dimensions and use a similar strategy. The firms in a strategic group occupy similar positions in the market, offer similar goods to similar customers, and may make similar decisions about production technology and organizational features. Competition among firms in a strategic group is more intense than the competition among a firm and those firms outside its strategic group. Actions of members in the firm's strategic group affect its strategic decisions in many areas including pricing, product quality, and distribution.

Who are the firm's strategic leaders? How do strategic leaders predict the profit outcomes of different strategic decisions?

The firm's strategic leaders include the CEO and top-level managers, but they also include organizational members who have been delegated strategic responsibilities. Strategic leaders use the strategic management process to help the firm reach its vision and mission. Mapping an industry's profit pool is one way strategic leaders can anticipate the profitability of different strategic decisions. A profit pool is the total profits earned in an industry along all points in the value chain. This helps the leaders determine where the primary sources of profit in the industry are located and allows them to take actions to tap these sources.

What are a firm's vision and mission? What is the value to the firm of having a specified vision and mission?

The firm's vision is a picture of what it wants to be and what it wants to ultimately achieve. The firm's mission is based on its vision. It specifies the business(es) in which the firm intends to compete and the customers it intends to serve. The value of having a vision and mission is that they inform stakeholders what the firm is, what it seeks to accomplish, and who it seeks to serve. A successful vision is inspirational. The mission is more concrete and guides employees' behavior as they achieve the firm's vision. Research shows that an effectively formed vision and mission positively impact firm performance in terms of growth in sales, profits, employment, and net worth.

Describe and discuss the resource-based model of above-average returns.

The resource-based model focuses on the firm's internal resources and capabilities. These resources and capabilities determine the firm's strategy and its ability to earn above-average returns. The firm's resources are inputs into its production process. Resources must be formed into capabilities, the capacity to perform a task or activity in an integrative manner. According to this model, capabilities evolve over time and must be managed dynamically to achieve above-average returns. Resources and capabilities that give a firm a competitive advantage are called core competencies. This model assumes that resources are not highly mobile across firms; consequently, all firms within a particular industry may not possess the same strategically relevant resources and capabilities. So, different firms will have different core competencies. The organizations strategy is based on finding the best environment in which to exploit its core competencies.

What are the primary aspects of the strategic management process? You may reference specific chapters from the text in formulating your response.

The strategic management process consists of three primary processes: 1) Analysis: involves the development of an understanding of the external environment and internal organization 2) Strategy formulation: with knowledge about its external environment and internal organization, the firm forms its vision and mission and makes decisions as to what strategies to utilize to provide returns to shareholders 3) Implementation: putting the formulated plan into action