Global Business Strategy Exam 1 (Chapters 1 - 6)

Competitive Advantage and Firm Performance

1. What is the firm's accounting profitability? 2. How much shareholder value does the firm create? 3. How much economic value does the firm generate?

Blue Ocean Strategy Gone Bad: "Stuck in the Middle"

A blue ocean strategy is difficult to implement because it requires the reconciliation of fundamentally different strategic positions—differentiation and low cost—which in turn require distinct internal value chain activities so the firm can increase value and lower cost at the same time.

Cost-Leadership Strategy: Benefits and Risks

A cost-leadership strategy is defined by obtaining the lowest-cost position in the industry while offering acceptable value. The cost leader, therefore, is protected from other competitors because of having the lowest cost. If a price war ensues, the low-cost leader will be the last firm standing; all other firms will be driven out as margins evaporate. Since reaping economies of scale is critical to reaching a low-cost position, the cost leader is likely to have a large market share, which in turn reduces the threat of entry.

Differentiation Strategy: Benefits and Risks

A differentiation strategy is defined by establishing a strategic position that creates higher perceived value while controlling costs. The successful differentiator stakes out a unique strategic position, where it can benefit from imperfect competition and command a premium price. A well-executed differentiation strategy reduces rivalry among competitors.

Competitive Advantage

A firm that achieves superior performance relative to other competitors in the same industry or the industry average...in this class we call this above average returns...Always relative, not absolute

Strategic Position

A firm's business-level strategy determines its strategic position—its strategic profile based on value creation and cost—in a specific product market. A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm's product creates and the cost required to produce it.

Business Models

A firm's plan that details how it intends to make money.

THE PESTEL Framework

A framework that categorizes and analyzes an important set of external factors (political, economic, sociocultural, technological, ecological, and legal) that might impinge upon a firm. These factors can create both opportunities and threats for the firm.

The Strategic Group Model

A framework that explains differences in firm performance within the same industry.

The Dynamic Capabilities Perspective

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

The Resource-Based View

A model that sees certain types of resources as key to superior firm performance.

Top-Down Strategic Planning

A rational, data-driven strategy process through which top management attempts to program future success.

Vision

A statement about what an organization ultimately wants to accomplish; it captures the company's aspiration.

In Porter's five forces model, what is meant by the term 'substitute'?

A substitute is an alternative product or service that performs the same function for the consumer

The VRIO Framework

A theoretical framework that explains and predicts firm-level competitive advantage.

Changes over Time: Industry Dynamics

Another dynamic to be considered is industry convergence, a process whereby formerly unrelated industries begin to satisfy the same customer need. Industry convergence is often brought on by technological advances.

According to the text, three ways to measure and assess firm performance include:

Assessing accounting profitability, shareholder value creation, economic value creation

Which of the following exemplifies the relationship between the competitive and general environments?

Awareness of personal health leads to lower demand, and greater rivalry in the alcoholic beverages industry.

Isolating Mechanisms: How to Sustain a Competitive Advantage

Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy. Several conditions can offer some protection to a successful firm by making it more difficult for competitors to imitate the resources, capabilities, or competencies that underlie its competitive advantage: ■ Better expectations of future resource value. ■ Path dependence. ■ Causal ambiguity. ■ Social complexity. ■ Intellectual property (IP) protection.

A firm's plan that details how it intends to make money.

Business Plan

Dynamic Nature of Business Models

Business models evolve dynamically, and we can see many combinations and permutations. Sometimes business models are tweaked to respond to disruptions in the market, efforts that can conflict with fair trade practices and may even prompt government intervention: Combination, Evolution, Disruption, Response to Disruption, and Legal Conflicts

Business-Level Strategy: How to Compete for Advantage

Business-level strategy details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It may involve a single product or a group of similar products that use the same distribution channel. It concerns the broad question, "How should we compete?" To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition: ■ Who—which customer segments will we serve? ■ What customer needs, wishes, and desires will we satisfy? ■ Why do we want to satisfy them? ■ How will we satisfy our customers' needs?

Blue Ocean Strategy: Combining Differentiation & Cost Leadership

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs.

Sociocultural Factors

Capture a society's cultures, norms, and values.

Technological Factors

Capture the application of knowledge to create new processes and products.

If a firm's resources and capabilities are costly to imitate because imitating firms may not understand the relationship between the resources and capabilities controlled by a firm and that firm's competitive advantage, this competitive advantage is said to be protected from imitation by ________________.

Causal Ambiguity

The Triple Bottom Line

Combination of economic, social, and ecological concerns—or profits, people, and planet—that can lead to a sustainable strategy.

While implementing strategic group mapping for the U.S. domestic airline industry, two strategic groups become apparent: low-cost, point-to-point airlines (Virgin Atlantic, Alaska Airlines, JetBlue, and Southwest Airlines) versus differentiated airlines using a hub-and-spoke system (American, Delta, and United). Which of the following statements is true about these two strategic groups?

Competitive rivalry between Virgin Atlantic and JetBlue is likely to be higher than that between American and Southwest airlines.

For over 58 years, McDonald's has had a partnership with Coca-Cola to provide sodas with its burgers and fries creating a(n) _________________ that enhances the dining experience of McDonald's customers.

Complement

Complements

Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.

According to the text, what three components are critical to evaluating any good or service?

Cost, Value, and Price

External stakeholders

Customers, competitors, suppliers, alliance partners, creditors, unions, communities, media, and governments at various levels

Economies of Scale

Decreases in cost per unit as output increases.

Mission

Description of what an organization actually does—the products and services it plans to provide, and the markets in which it will compete.

Differentiate the roles of firm effects and industry effects in determining firm performance.Industry effects: describe the underlying economic structure of the industry.

Determined by elements common to all industries. About 20%of a firm's profitability depends on the industry it's in.

When a firm enjoys a competitive advantage, it attracts a significant amount of attention and its products or services can be at risk due to: A. Social complexity. B. Value erosion. C. Causal ambiguity. D. Direct imitation or substitution.

Direct imitation or substitution

When cost per unit increases as output increases, this reflects __________________.

Diseconomies of scale

Your text discusses Dr Shetty, whose health group reduces costs through ___________ by performing thousands of heart surgeries a year, allowing his firm's high fixed costs to be spread out over a much larger volume of surgeries.

Economies of scale

From the list below, identify which factor does not form one of the six key areas of a PESTEL analysis.

Educational changes

Firm Effects

Firm performance is attributed to managerial actions. More important factor in determining firm performance than external environment forces. A firm's strategy can explain up to 55%of its performance.

Rolls Royce makes a car that is considered by many to be the height of luxury. Its targeted features and its $400K price tag suggests that the company is using a _________________ competitive strategy.

Focused Differentiation

Jake's Super Software Inc. provides a minimally supported version of their software as a trial to give the users a chance to try the product. Users later have the option of purchasing a supported version of the software, which includes a full set of product features and product support. This is an example of a ____________.

Freemium Business Model

Economic Factors

In a firm's external environment are largely macroeconomic, affecting economy-wide phenomena. Managers need to consider how the following five macroeconomic factors can affect firm strategy: Growth rates, Levels of employment, Interest rates, Price stability (inflation and deflation), and Currency exchange rates.

Industry Structure and Firm Strategy: The Five Forces Model

Include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm's profit potential.

Mobility Barriers

Industry-specific factors that separate one strategic group from another.

Industry Competitive Rivalry

Industry: A group of incumbent companies that face more or less the same set of suppliers and buyers. Industry analysis: A method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry. Elements and features common to all industries, including the number and size of competitors, the firms' degree of pricing power, the type of product or service offered, and the height of entry barriers.

Ecological Factors

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

Which of the following is a primary feature of the five forces model?

It views competition within an industry broadly to include forces such as buyers, suppliers, and the threat of substitutes.

Customer Service

Managers can increase the perceived value of their firms' product or service offerings by focusing on customer service.

Strategy as Planned Emergence

Managers engaged in a more formalized approach to the strategy process may also fall prey to an illusion of control, which describes a tendency by managers to overestimate their ability to control events.

If Sony and Microsoft develop the same customer knowledge base and create gaming products that provide the same customer appeal as Nintendo, then:

Nintendo will have a resource that is valuable but no longer rare.

Apply a triple bottom line to assess and evaluate competitive advantage.

Noneconomic factors can have a significant impact on a firm's financial performance, not to mention its reputation and customer goodwill.

Cost of Input Factors

One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

Product Features

One of the obvious but most important levers that managers can adjust is product features, thereby increasing the perceived value of the product or service offering. Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price.

Stakeholders

Organizations, groups, and individuals. They can affect or are affected by a firm's actions. Have a vested claim or interest in the performance and continued survival of the firm.

Sustainable Competitive Advantage

Outperforming competitors or the industry average over a prolonged period of time.

The fact that the U.S. still uses a system of measurement from the 1820's instead of the metric system and is at a disadvantage in certain cross-border transactions and negotiations demonstrates that:

Path dependence can affect the ability to remain competitive.

Competitive Parity

Performance of two or more firms at the same level.

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

Profit

The assumption under the resource-based model that firm resources and capabilities differ across firms and that this leads to performance differences is referred to as _______________.

Resource Heterogeneity

Political Factors

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

Shareholder Value Creation

Shareholders—individuals or organizations that own one or more shares of stock in a public company—are the legal owners of public companies. From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

Evaluate the relationship between stakeholder strategy and sustainable competitive advantage.

Stakeholder Strategy: An integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage. Stakeholder Impact Analysis: A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen.

Values

Statement of principles to guide an organization as it works to achieve its vision and fulfill its mission, for both internal conduct and external interactions; it often includes explicit ethical considerations.

Internal stakeholders

Stockholders, employees (including executives, managers, and workers), and board members.

The Balanced Scorecard

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

Scenario Planning

Strategy-planning activity in which top management envisions different what-if scenarios to anticipate plausible futures in order to derive strategic responses.

Explain the role of strategy in a firm's questfor competitive advantage.

Superior performance relative to other competitors in the same industry or the industry average.

Apply a balanced scorecard to assess and evaluate competitive advantage.

The balanced-scorecard approach attempts to provide a more integrative view of competitive advantage.

Economic Value Creation

The difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. (Value - Cost)

Business-Level Strategy and the Five Forces: Benefits and Risks

The five forces model helps managers assess the forces—threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing competitors—that make some industries more attractive than others. With this understanding of industry dynamics, managers use one of the generic business-level strategies to protect themselves against the forces that drive down profitability.

Cost-Leadership Strategy: Understanding Cost Drivers

The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors while offering adequate value. The cost leader, as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers. The cost leader attempts to optimize all of its value chain activities to achieve a low-cost position.

Differentiation Strategy: Understanding Value Drivers

The goal of a differentiation strategy is to add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price.

The Value Chain Analysis

The internal activities a firm engages in when transforming inputs into outputs; each activity adds incremental value.

The Power of Buyers

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.

Explain economic value creation and different sources of competitive advantage.

The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy of cost leadership or differentiation.

The Power of Suppliers

The relative bargaining power of suppliers is high when: ■ The suppliers' industry is more concentrated than the industry it sells to. ■ Suppliers do not depend heavily on the industry for a large portion of their revenues. ■ Incumbent firms face significant switching costs when changing suppliers. ■ Suppliers offer products that are differentiated. ■ There are no readily available substitutes for the products or services that the suppliers offer. ■ Suppliers can credibly threaten to forward-integrate into the industry.

The Threat of Entry

The risk that potential competitors will enter an industry.

Strategic Groups

The set of companies that pursue a similar strategy within a specific industry.

Value Innovation

The simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy.

The Threat of Substitutes

The threat of substitutes is high when: ■ The substitute offers an attractive price-performance trade-off. ■ The buyer's cost of switching to the substitute is low.

Outline how business models put strategy into action.

The translation of a firm's strategy (where and how to compete for competitive advantage) into action takes place in the firm's business model (how to make money).

Generic Business Strategies

There are two fundamentally different generic business strategies—differentiation and cost leadership. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers. A cost-leadership strategy, in contrast, seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers.

Which of the following expresses a risk for firms that institute a blue ocean strategy?

They could get "stuck in the middle"

Two Critical Assumptions

Two assumptions are critical in the resource-based model: (1) resource heterogeneity - Assumption in the resource-based view that a firm is a bundle of resources and capabilities that differ across firms - and (2) resource immobility - Assumption in the resource-based view that a firm has resources that tend to be "sticky" and that do not move easily from firm to firm..

Competitive Disadvantage

Underperformance relative to other competitors in the same industry or the industry average.

Core Competencies

Unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage.

Implications for the Strategist

Using SWOT Analysis (A framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses (S and W) with those from an analysis of external opportunitiesand threats (O and T) to derive strategic implications) to Generate Insights from External and Internal Analysis

Accounting Profitability

Using accounting data to assess competitive advantage and firm performance is standard managerial practice. When assessing competitive advantage by measuring accounting profitability, we use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets. Since competitive advantage is defined as superior performance relative to other competitors in the same industry or the industry average, a firm's managers must be able to accomplish two critical tasks: 1. Accurately assess the performance of their firm. 2. Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average.

Learning Curve

We assumed the underlying technology remained constant, while only cumulative output increased.

Experience Curve

We change the underlying technology while holding cumulative output constant.

The Strategic Management Process

We turn to the process or method by which strategic leaders formulate and implement strategy. When strategizing for competitive advantage, managers rely on three approaches: 1. Strategic planning. 2. Scenario planning. 3. Strategy as planned emergence.

Strategic Leadership

What Do Strategic Leaders Do?How Do You Become an Effective and Ethical Strategic Leader?Formulating Strategy across Levels

Popular Business Models

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