Strategic management test 2

Competitive forces

- Threat of Entry - power of suppliers - power of buyers - threat of substitutes - rivalry among existing competitors

the economic value creation framework shows that strategy is about

- creating economic value - capturing as much of it as possible

Risks of vertical intergration

- increasing cost - reducing quality - reducing flexibility - increasing the potential for legal repercussions.

conglomerate

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

market capitalization

a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time.

Four types of business diversification are

- Single business - Dominant business - Related diversification - Unrelated diversification: conglomerate.

Strategic alliance

A voluntary arrangement between firms that involves sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

Trade secret

Valuable proprietary information that is not in the public domain and where the firms make every effort to maintain its secrecy

Strategic alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

popular business models

- Razor- razorblades - Subscription - pay as you go - Freemium - Wholesale - Agency - Bundling

Multidimensional perspective for assessing a competitive advantage.

- Accounting profitability - how much shareholder value does the firm create? - how much economic value does the firm generate?

Two integrative frameworks, combining quantitative data with qualitative assessments

- Balanced scorecard - Triple bottom line

We break down return into three additional financial ratios

- COGS - R&D - Selling, general, & administrative expense/ Revenue

Dynamic nature of business models

- Combination - Evolution - Disruption - Response to disruption - legal conflicts

Value innovation- lower cost

- Eliminate: Which factors can be eliminated? - Reduce: Which of the factors should be reduced below standard?

Within Decline, managers may try and

- Exit - Harvest - Maintain - Consolidate

Why firms need to grow

- Increase profits - Lower costs - Increase market power - Reduce risk - Motivate management

Industry life cycle

- Introduction - Growth - Shakeout - Maturity - Decline

Value Innovation- Increase perceived consumer benefits

- Raise: Which factors should be above standard? - Create: Which factors can be offered that haven't been?

Benefits of vertical integration

- lowering cost - improving quality - facilitating scheduling and planning - facilitating investments in specialized assets - securing critical supplies and distribution channels

Richard Rumelt developed a helpful classification scheme that identifies four main types of diversification by looking at two variables:

- the percentage of revenue from the dominant or primary business - the relationship of the core competencies across the business units.

A firms manager must be able to accomplish two critical risks

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 industries average.

Total invested capital consist of two things

1: Shareholders equity through the selling of shares to the public 2: interest bearing debt through borrowing from financial institutions and bondholders

Markets- and - technology framework

A conceptual model to categorize innovations along the market (existing/ new) and technology (existing/new) dimensions.

Absorptive capacity

A firms ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.

Licensing

A form of long term contracting in the manufacturing sector that enables firms to commercialize intellectual property.

Open Innovation

A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and innovations are insourced while others are spun out.

Reverse innovation

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

Forward vertical integration

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

Backward vertical integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.

strategic trade- offs

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

Crossing- the- chasm framework

Conceptual model that shows each stage of the industry life cycle is dominated by a different customer group. - Tech Enthusiast - Early Adopters - Early Majority - Late Majority - Laggards

Industry value chain

Depiction of the transformation of raw material into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing.

diseconomies of scale

Increase in cost per unit when output increases.

R&D/ Revenue

Indicates how much of each dollar that the firm earns in sales is invested to conduct research and development

Return on Revenue

Indicates how much of the firm's sales is converted into profit.

minimum efficient scale (MES)

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest cost position that is achievable through economies of scale.

Innovation

The commercialization of any new product or process, or the modification and recombination of existing ones.

alliance management capability

a firms ability to effectively manage three alliance related task concurrently: (1)partner selection and alliance formation (2)alliance design and governance and (3) post formation alliance management

Innovation ecosystem

a firms embeddedness in a complex network of suppliers, buyers, and complementary, which require interdependent strategic decision making.

business model

a firms plan that details how it intends to make money.

Patent

a form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea.

managerial hubris

a form of self delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

related constrained diversification strategy

a kind of related diversification strategy in which executives pursue only businesses where they can apply the resource and core competencies already available in the primary business

related linked diversification strategy

a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages.

Franchising

a long term contract in which a franchisor grants a franchisee the right to use the franchisors trademark and business processes to offer goods and services that carry the franchisors brand name.

Credible commitment

a long term strategic decision that is both difficult and costly to reverse

Architectural innovation

a new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets.

Joint venture

a stand alone organization created and jointly owned by two or more parent companies.

sustainable strategy

a strategy alone the economic, social, and ecological dimensions that can be pursued over time without detrimental effects on the people or the planet.

Transaction cost economies

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

Taper integration

a way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms for some its supplies and/ or is forwardly integrated but also relies on outside market firms for some of its distribution.

transaction cost

all internal and external cost associated with an economic exchange, whether within a firm or in markets.

Value curve

horizontal connection of the points of each value on the strategy canvas that helps strategist diagnose and determine the course of action.

Standard

an agreed upon solution about a common set of engineering features and design choices

Radical innovation

an innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge basers with a new stream of knowledge.

Disruptive innovation

an innovation that leverages new technologies to attack existing markets from the bottom up.

Incremental innovation

an innovation the squarely builds on an established knowledge base and steadily improves an existing product or service.

producer surplus

another term for profit, the difference between price charged the cost to produce, also called profit.

real option perspective

approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time.

Blue Ocean strategy

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

Triple bottom line

combination of economic, social, and ecological concerns- or profits, people, and planet- that can lead to a sustainable strategy

First- mover advantages

competitive benefits that accrue to the successful innovator

build-borrow- or buy framework

conceptual model that aids firms in deciding whether to pursue internal development, enter a contractual arrangement or strategic alliance, or acquire new resources, capabilities, and competencies.

co-operation

cooperation by competitors to achieve a strategic objective

unrelated diversification strategy

corporate strategy in which a derives less than 70 percent of its revenue from a single business and there are few, if any, linkages among its businesses.

Related diversification

corporate strategy in which a firm derives less than 70 percent of its revenue from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.

External transaction cost

cost of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.

Internal transaction costs

cost pertaining to organizing and economic exchange within a hierarchy; also called admin cost.

economies of scale

decrease in cost per unit as output increases

consumer surplus

difference between the value of a consumer attaches to a good or the service and what he or she paid for it.

Single business

firm derives 95%+ of its revenue from one business.

Dominant business

firm derives between 70%- 95% of its revenues from a single business, but it pursues at least one other business activity that accounts for the remainder of revenue.

differentiation strategy

generic business strategy that seeks to create higher value for customers than the value that competitors create.

cost- leadership strategy

generic business strategy that seeks to create the same or similar value for customers at a lower cost.

Strategy canvas

graphical depiction of a companies relative performance vis-a- vis its competitors across the industries key success factors.

COGS/ Revenue

indicates how efficiently a company can produce a good.

SG&A/ Revenue

indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative expenses.

Shareholders

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

tacit knowledge

knowledge that cannot be confined; concerns knowing how to do a certain task and can be acquired only through active participation in that task.

Winner take all market

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

Fixed asset turnover

measures how well a company leverages its fixed assets, particular property, plant, and equipment.

strategic outsouring

moving one or more internal value chain activities outside the firms boundaries to other firms in the industry value chain.

Product innovations

new or recombined knowledge embodied in new products

process innovation

new ways to produce existing products or deliver existing services.

The the multidimensional perspectives tend to be correlated

particularly overt time

equity alliances

partnership in which at least one partner takes partial ownership in the other.

non equity alliances

partnerships based on contracts between firms

total return to shareholders

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

focused cost- leadership strategy

same as the cost- leadership strategy except with a narrow focus on niche market.

Focused differentiation strategy

same as the differentiation strategy but with a narrow focus on niche market

economies of scope

savings that come from producing two outputs at less cost than producing each output individually, despite using the same resources and technology.

principal agent problem

situation in which an agent performing activities on behalf of a principal pursues his or her own interests.

Information asymmetry

situation in which one party is more informed than another because of the possession of private information.

diversification discount

situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.

diversification premium

situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units.

learning races

situations in which both partners in a strategic alliance are motivated to form an alliance but for learning, but the rate at which firms learn may vary.

relational view of competive advantage

strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries.

Entrepreneurs

the agents that introduce change into the competitive system.

Corporate strategy

the decisions that senior management makes and the goal directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously.

Vertical integration

the firms ownership of its production of needed inputs or of the channels by which it distributes its output.

Industry life cycle

the five different stages- intro, growth, shakeout, maturity, and decline that occur in the evolution of an industry over time.

business level strategy

the goal- directed actions managers take in their quest for competitive advantages when competing in a single product market.

reservation price

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

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

Network effects

the positive effect (externality) that one user of a product or service has on the value of that product for the other users.

horizontal integration

the process of merging with competitors leading to industry consolidation.

Strategic entrepreneurship

the pursuit of innovation using tools and concepts from the strategic management

Social entrepreneurship

the pursuit of social goals while creating a profitable business.

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.

scope of competiton

the size-narrow or broad- of the market in which a firm choose to compete.

invention

the transformation of an idea into a new product or process, or the modification and recombination of existing ones.

all accounting data are historical

thus backward looking

specialized assets

unique assets with high opportunity costs.

Vertical market failure

when the markets along the industry value chain are too risky, and alternatives too costly in time or money

Accounting profitability and economic value creation tend to be reflected in the firm's stock price

which in turn determines in part the stock's market valuation

Working capital turnover

which is a measure of how effectively capital is being used to generate revenue